1982 (6) TMI 37 - HC - Income Tax

Summary

Issues involved:
The judgment addresses two main issues:
1. Whether certain loans should be treated as debentures for the purpose of granting relief under section 80J of the Income-tax Act, 1961.
2. Whether interest income from bank deposits should be considered as business income for the purpose of section 80J of the Income-tax Act, 1961.

Issue 1: Treatment of Loans as Debentures
The case involved agreements entered into by the company with financiers in the United States for medium term dollar loans. The company claimed relief under section 80J of the Income-tax Act but did not treat the loans as liabilities under rule 19A of the Income-tax Rules. The Income Tax Officer treated the loans as liabilities, reducing the capital employed for the purpose of relief under section 80J. The company appealed, arguing that the loans should be considered debentures. The Tribunal found in favor of the company, considering the loans as debentures. The High Court analyzed the nature of debentures and concluded that the loans, issued under agreements and acknowledging the company's indebtedness, were rightly treated as debentures for the purpose of section 80J relief. Therefore, the court answered the first question in favor of the assessee and against the Revenue.

Issue 2: Treatment of Interest Income
The court also addressed whether interest income from bank deposits should be classified as business income for section 80J purposes. Referring to a previous decision involving the same assessee for the assessment year 1970-71, the court ruled that income generated from depositing surplus cash in banks, although derived from profits of the industrial undertaking, did not qualify as income falling within section 80J. The court emphasized that the income must be directly connected with the business activity of the industrial undertaking to be eligible for relief under section 80J. Therefore, the court answered question No. 2 against the assessee and in favor of the Revenue based on the previous decision.

Conclusion:
The High Court of Kerala ruled on two key issues regarding the treatment of loans as debentures and the classification of interest income for section 80J relief. The court upheld the Tribunal's decision to consider the loans as debentures, granting relief under section 80J, while denying the classification of interest income from bank deposits as business income under the same section.