1997 (1) TMI 45 - HC - Income Tax

Summary

Issues Involved:
1. Whether the interest on term deposits should be treated as "business income" or "income from other sources".

Summary:

Issue: Classification of Interest Income
The primary issue in this case is whether the interest income earned by the assessee, a public limited company engaged in refining petroleum products, should be classified as "business income" or "income from other sources" u/s 256(1) of the Income-tax Act, 1961.

Tribunal's Findings:
The Tribunal held that the interest income from term deposits should be treated as "business income". It reasoned that the investing of surplus moneys in term deposits was interconnected with the carrying on of the assessee's business. The Tribunal noted that the deposits served two objectives: easy accessibility of money when needed and earning interest to reduce borrowing costs. The Tribunal also observed that this interest could be linked to the interest that the assessee charges from its customers on overdue payments, which is regarded as business income.

Department's Argument:
The Department contended that the interest income should be classified as "income from other sources" because the assessee is not engaged in money-lending or financing business. The Department argued that the interest income is directly related to the deposits made in the bank and not to the business activities of refining petroleum products. They cited several cases to support their argument, including Murli Investment Co. v. CIT, CIT v. Rajasthan Land Development Corporation, Bokaro Steel Ltd. v. CIT, and Collis Line Pvt. Ltd. v. ITO.

Assessee's Argument:
The assessee argued that the interest income should be considered as "business income" because the deposits were made from business funds that were not immediately required. The deposits were part of good cash management and were treated as capital employed in the business for the purpose of section 80J of the Act. The assessee cited cases like CIT v. Tamil Nadu Dairy Development Corporation Ltd., CIT v. A. P. Industrial Infrastructure Corporation Ltd., and Snam Progetti S. P. A. v. Addl. CIT to support their argument.

Court's Analysis:
The court noted that different High Courts have varied in their conclusions on whether interest earned on deposits should be assessed as "business income" or "income from other sources". The court emphasized that each case should be decided based on its peculiar facts. In this case, the court observed that the deposits were treated as capital employed for the purpose of section 80J of the Act, and the Department had accepted this treatment. Therefore, the interest income from these deposits should be treated as "business income".

Conclusion:
The court affirmed the Tribunal's decision and held that the interest income from bank deposits should be assessed under the head "business income". The question referred to the court was answered in the affirmative and against the Department. No costs were awarded.