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TMI Blog1981 (2) TMI 50X X X X Extracts X X X X X X X X Extracts X X X X ..... t income was Rs. 6,56,310 making a net loss of income of Rs. 1,22,32,510. In the year 1970-71, when the petitioner made a net loss, the question that has arisen for consideration is : " Whether the interest income could be deducted from the business loss so as to give a net loss as claimed, or whether the interest income was to be treated as separate and not to be set off?" The petitioner's claim in this respect is that excess business funds available with the company were placed on short-term deposits with the bank and the interest income is also business income. As submitted by the learned counsel, this is a foreign company which has come from Italy to do business in India and not to earn bank interest. Excess funds or unutilised funds are deposited with banks but these remain business funds and are not investments in bank deposits. This question, namely, how the set-off was to be allowed became more material in the year 1971-72, because in that year the assessee earned the following income: (i) Rs. 1,99,978 for technical services to Lube India Ltd., (ii) Rs. 29,73,145 profits from business, and (iii) the sum of Rs. 5,39,037 was interest income. It became material ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es, namely, Western States Trading Co. P. Ltd. v. CIT [1971] 80 ITR 21 (SC), CIT v. Bhavnagar Trust Corporation (P.) Ltd. [1968] 69 ITR 278 (Guj), CIT v. Shrikishan Chandmal [1966] 60 ITR 303 (MP) and CIT v. Chugandas and Co. [1965] 55 ITR 17 (SC). The Addl. Commissioner came to the conclusion that business income was income which arose from assets held as trading assets or as stock-in-trade and the cases just referred to were distinguishable. Accordingly, it was held that the assessee had used money available with him for getting interest and this income could not be treated as income from other sources. Being aggrieved by this order, the petitioner has moved the present petition under art. 226 of the Constitution. The question we have to decide is: whether the income received by the assessee as interest from deposits with banks can be treated as business income for the purposes of making adjustments against business losses carried forward from the previous year ? and (b) whether the petitioner was correct in the contention that a complete adjustment and set-off had been granted by the ITO against all the income for 1971-72, including income from other sources ? It is convenient ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ncome derived by the petitioner. No doubt, normally, on the placing of funds in banks on short-term or long-term deposits the interest income derived from those sources would be "income from other sources", but there have been cases in which such income has been treated as income from business, notwithstanding the fact that it is interest income. The adjustment allowable under the I.T. Act in respect of losses and gains are set out in ss. 71 and 72 of the Act as far as they are material in this case. If there is a gain under one head and a loss under another head (excluding the case of capital gain), then there could be an adjustment or set-off between the loss of one head and the gain or income of another head in the same year, but in the case of carry forward losses, the carry forward is allowed under s. 72 and the set-off of losses has to be against business-income. The carry forward loss in one business can be set off against the income from another business but this does not apply to income from other sources. For instance, if there is a carry forward business loss it cannot be adjusted against " income from other sources ", such as dividend income or interest income. This leg ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Act of 1922). The point that was decided by the Supreme Court was that though the interest income was taxed under s. 8 of the Act, it would remain profits from the banking business. The mere fact that for the purposes of taxation different section applied did not mean that the interest ceased to be derived from banking. Hence, the interest income as well as the general banking income of the bank was really derived from one activity, namely, that of banking. This principle has now to be applied to the present case. If a person runs a bank or other business and utilises his funds for the purpose of that business, it is also open to the same person to use some of the funds for business and to keep a part of the funds in a form where it yields income. The question to be seen in such a case is whether the interest income is derived also from what may be described as "business activity ". If it is so derived then the mere fact that it is taxed under a different section will make no difference. The approach to the problem has, therefore, to be disassociated from the section under which the tax is imposed on the form of income. To revert again to the United Commercial Bank's case (1957) ..... X X X X Extracts X X X X X X X X Extracts X X X X
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