1996 (2) TMI 184 - AT - Income Tax

Assessing Officer, Assessment Year, Business Income, Business Loss, Industrial Undertaking, Interest Income, Interest On Bank Deposits, Previous Year, Profits And Gains, Succession To Business

Issues Involved:
1. Assessability of interest income as business income or income from other sources.
2. Allowance of loss in sea food business as a business loss.
3. Exemption under section 10A of the Income-tax Act for interest income.
4. Assessability of income from Kandla Unit in the hands of the assessee or the holding company.

Detailed Analysis:

1. Assessability of Interest Income as Business Income or Income from Other Sources
During the assessment year 1983-84, the assessee claimed exemption on interest income from bank deposits as business income under section 28(1) of the Income-tax Act. The Assessing Officer treated it as income from other sources, while the CIT (Appeals) held it as business income, citing its direct connection to the export business funds. The Tribunal upheld the CIT (Appeals)'s decision, stating, "the deposits in the banks were made with the money received in the export business, and in that sense the interest income sprang from the business activity of the assessee." Thus, the appeal by Revenue on this ground was dismissed.

2. Allowance of Loss in Sea Food Business as a Business Loss
The assessee claimed a deduction for a loss of Rs. 96,256 in the sea food business. The Assessing Officer denied this, arguing no business was conducted, and no expenditure was necessary. The CIT (Appeals) allowed the deduction, noting the business was authorized by the Memorandum and Articles of Association, and the loss represented commission paid on purchases. The Tribunal agreed with the CIT (Appeals), emphasizing the assessee's legitimate business activities and future prospects in the export market. Consequently, the Department's appeal on this ground was dismissed.

3. Exemption under Section 10A of the Income-tax Act for Interest Income
For the assessment year 1983-84, the assessee sought exemption under section 10A for interest income, claiming it arose from an industrial undertaking in a free trade zone. The Assessing Officer and CIT (Appeals) denied this, stating the interest income did not directly derive from the industrial undertaking. The Tribunal upheld this view, referencing the Supreme Court's distinction between "derived from" and "attributable to" in Cambay Electric Supply Industrial Co. Ltd. v. CIT. The Tribunal concluded, "the assessee is not entitled to the exemption under section 10A in respect of the interest income on the bank deposits."

4. Assessability of Income from Kandla Unit in the Hands of the Assessee or the Holding Company
For the assessment year 1984-85, the assessee argued that income from the Kandla Unit should be taxed in the hands of the holding company, Ponds (India) Ltd., due to a transfer agreement dated 10-12-1983. The Assessing Officer and CIT (Appeals) rejected this, citing the retrospective nature of the agreement and the continuation of business by the assessee. The Tribunal agreed, noting the legal transfer occurred only on 29-12-1983 and the business was conducted by the assessee until then. The Tribunal referenced section 170(1) of the Income-tax Act, which mandates assessment in the hands of the predecessor up to the date of succession. The Tribunal allowed for the exclusion of income earned from 29-12-1983 to 1-1-1984 if the assessee could provide evidence. Subject to this modification, the Tribunal confirmed the CIT (Appeals)'s order, dismissing the assessee's appeal.

Conclusion:
The Tribunal upheld the CIT (Appeals)'s decisions on all grounds, affirming the assessability of interest income as business income, allowance of the sea food business loss, denial of section 10A exemption for interest income, and assessability of Kandla Unit's income in the hands of the assessee until the date of legal transfer. The assessee's appeal for the assessment year 1984-85 was dismissed with a minor modification regarding the income exclusion for the period after the transfer date.

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