1994 (12) TMI 105 - AT - Income Tax

Summary

Issues:
Assessment of interest income as business income or income from other sources.

Analysis:
The judgment pertains to an appeal by the assessee regarding the assessment of interest income for the year 1985-86. The assessee, a trust established in 1979 for five beneficiaries, had earned interest income of Rs. 74,680 from advances made using the trust fund after stopping its business activities. The Income Tax Officer (ITO) assessed this interest income as business income under section 161(1A) at the maximum marginal rate. The first appellate authority upheld the ITO's decision, considering the interest income as business income. However, the assessee contended that the trust had ceased its business activities with the intention of earning income for the beneficiaries without engaging in business. The assessee argued that the interest income should be classified under "income from other sources" rather than as business income.

The ITO's order emphasized the broad interpretation of the term "business" in fiscal statutes and referenced the Supreme Court's decision in McDowell & Co. Ltd. vs. CTO, highlighting the distinction between genuine business activities and tax avoidance schemes. However, the appellate tribunal found the ITO's reasoning unsupportable and emphasized that not every activity can be categorized as business. The tribunal noted that the trust had surrendered its sales-tax license and had the authority to invest funds for the beneficiaries' benefit without engaging in business activities.

The tribunal considered the case law cited by the assessee, including the decisions of the Patna High Court and the Calcutta High Court, to support its argument that the interest income should be classified as "income from other sources." It differentiated between investment activities and business operations, highlighting that the trust's decision to invest the surplus funds after ceasing its silk business did not constitute a business activity. The tribunal concluded that the interest income was not assessable under the head "business" but should be categorized as "income from other sources."

In light of the above analysis, the appellate tribunal allowed the appeal by the assessee, directing the ITO to modify the assessment to classify the interest income under "income from other sources" based on the findings of the tribunal.