1987 (12) TMI 69 - AT - Income Tax

Summary

Issues Involved:
1. Classification of rental income (business income vs. income from other sources).
2. Classification of interest income (business income vs. income from other sources).
3. Basis of accounting for interest income (cash basis vs. accrual basis).

Detailed Analysis:

1. Classification of Rental Income:
The primary issue was whether the rental income received by the assessee should be classified as business income or income from other sources. The Tribunal examined the Memorandum of Association of the assessee-company and the intention behind acquiring the immovable property. It was found that the property was acquired with the intention of setting up a textile manufacturing unit, not for letting out. The Tribunal noted, "The directors, in their report dated 1-12-1976 to the shareholders, stated that the property was acquired with an object to put some industrial plant very shortly." Therefore, the rental income could not be regarded as business income because the business of manufacturing had not commenced in the relevant accounting year. The Tribunal upheld the Income-tax Officer's decision that the rental income should be assessed as income from other sources since the assessee had not acquired legal title to the immovable property in the relevant year.

2. Classification of Interest Income:
The second issue was whether the interest income should be classified as business income or income from other sources. The Tribunal noted that the assessee had advanced funds to Roger Enterprises and received interest income. The Income-tax Officer had assessed this interest income as income from other sources, allowing interest paid on borrowed funds as a deduction in computing this income. The Tribunal agreed with the Income-tax Officer's assessment, stating, "Interest on investment of surplus fund would be assessable under the head 'Income from other sources'." The Tribunal found no evidence that the assessee was carrying on a business of money-lending, and thus, the interest income could not be classified as business income.

3. Basis of Accounting for Interest Income:
The third issue was the basis of accounting for interest income. The assessee initially contended that interest income should be assessed on a cash basis while interest expenses should be on an accrual basis. However, this contention was given up before the Commissioner of Income-tax (Appeals), who confirmed the assessment of interest on an accrual basis. The Tribunal upheld this decision, noting, "The assessee-company is following mercantile system of accounting and only for the single transaction of interest income it is contended that cash basis has been followed." The Tribunal found no reason to deviate from the established accounting method, confirming the interest income should be assessed on an accrual basis.

Conclusion:
The Tribunal dismissed the appeals, affirming that:
- The rental income should be assessed as income from other sources, not business income.
- The interest income should also be assessed as income from other sources, not business income.
- The interest income should be assessed on an accrual basis in line with the mercantile system of accounting followed by the assessee.