Commissioner Of Income-Tax v. Tamil Nadu Dairy Development Corporation Ltd.

The Judgment of the Court was delivered by

S.M Ali Mohamed, J.:— By its reference under section 256(1) of the Income-tax Act, 1961 (hereinafter referred to as “the Act”), the Income-tax Appellate Tribunal, Madras Bench “C”, has referred, at the instance of the Commissioner of Income-tax, the following questions of law for the opinion of this court:

“(1) Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in holding that the registration of the conveyance deed transferring certain buildings, plant and machinery by the Government to the assessee is not required and, therefore, depreciation claimed should be granted?

(2) Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in holding that the interest on short-term deposits should be treated as business income of the assessee ?”

2. The material facts giving rise to the reference are as follows:

The assessee, the Tamil Nadu Dairy Development Corporation Limited, is a public limited company. The assessment for the assessment year 1974–75 was completed on July 31, 1975, which on appeal was set aside. The Income-tax Officer made the reassessment on February 28, 1978. In the course of the proceedings, the Income-tax Officer found that the Tamil Nadu Government has transferred certain units of the Dairy Develop-ment Department to the assessee-company by a Government Order, dated June 29, 1972, which has resulted in the transfer of, assets and liabilities to the company. Among the assets transferred were land and buildings amounting to Rs. 34,26,510 which were handed over to the corporation and the assessee has claimed depreciation of Rs. 1,61,775 on these assets. The Income-tax Officer found that though the possession has been handed over to the assessee, no transfer by way of registration as contemplated under section 54 of the Transfer of Property Act was made. The Income-tax Officer held that the condition precedent for granting depreciation under section 32 of the Income-tax Act was not satisfied and, therefore, the assessee was not entitled to depreciation. He further rejected the asses-see's contention that the Government Grants Act, 1895, would apply to the assessee's case. He further found that the assessee derived interest of Rs. 3,11,963 on short-term deposits. As the assessee's business does not include deposit of money and earning interest, the interest so earned on the deposits should be treated as income from other sources only. Thus, the assessment was completed on a nil income after adjusting the unabsorbed depreciation of the year 1973–74. Similarly, in the assessment for the year 1973–74, the Income-tax Officer did not allow depreciation on the building transferred by the Government to the assessee and assessed the interest on short-term deposits under “Other sources”. On appeal, the Commissioner of Income-tax held:

“That the purpose of the assessee in investing them in short-term deposits is to make them available for its business purposes and, there-fore, the interest on such deposits should be treated only as the business income of the assessee.”

3. Thus, the assessee's appeals were allowed. The Department went on appeal to the Appellate Tribunal. The Appellate Tribunal, relying on the Appellate Tribunal's order in I.T.A No. 1692/(Mds) of 1976–77, dated March 29, 1978 in the case of Tamil Nadu Small Industries Development Corporation Ltd., confirmed the finding of the Commissioner of Income-tax (Appeals) that the assessee is the owner of the building transferred by the Government and that the assessee is entitled to depreciation.

4. As regards the assessment of the interest on short-term deposits, the Appellate Tribunal held that as the investment was made out of the business funds available with the assessee, the assessee is entitled to treat the interest income as the income from business. Thus, the Departmental appeals were dismissed.

5. N.V Balasubramaniam, learned counsel for the Revenue, contended that as there was no transfer of land and building by registered instru-ment as per section 54 of the Transfer of Property Act, the assessee-company was not the owner of the assets to claim depreciation under section 32 of the Act and that the Appellate Tribunal erred in law in dismissing the appeals preferred by the Department. On the other hand, learned counsel for the assessee-company submitted that there is no error of law in the appellate order of the Tribunal in view of section 2 of the Government Grants Act, 1895, which excludes the operation of the Transfer of Property Act, 1882, to Government grants.

6. There is force in the contention of learned counsel for the assessee-company. The Supreme Court in Express Newspapers (P.) Ltd. v. Union of India, (1986) 1 SCC 133 : AIR 1986 SC 872, considering sections 2 and 3 of the Govern-ment Grants Act, 1895, has, observed as follows (at page 910):

“The Act contains two sections and provides by section 2 for the exclusion of the Transfer of Property Act, 1882, and, by section 3 for the exclusion of any rule of law, statute or enactment of the Legislature to the contrary. Sections 2 and 3 read as follows:

‘2. Transfer of Property Act, 1882, not to apply to Government grants.— Nothing in the Transfer of Property Act, 1882, contained shall apply or be deemed ever to have applied to any grant or other transfer of land or of any interest therein heretofore made or hereafter to be made by or on behalf of the Government to, or in favour of, any person whomsoever; but every such grant and transfer shall be construed and take effect as if the said Act had not been passed.’

‘3. Government grants to take effect according to their tenor, — All provisions, restrictions, conditions and limitations overcontained in any such grant or transfer as aforesaid shall be valid and take effect according to their tenor, any rule of law, statute or enactment of the Legislature to the contrary notwithstanding.’

It is plain upon the terms that section 2 excludes the operation of the Transfer of Property Act, 1882, to Government grants. While section 3 declares that all provisions, restrictions, conditions and limitations contained over any such grant or transfer as aforesaid shall be valid and shall take effect according to their tenor, notwithstanding any rule of law, statute or enactment of the Legislature to the contrary. A series of judicial decisions have determined the overriding effect of section 3 making it amply clear that a grant of property by the Government partakes of the nature of law since it overrides even legal provisions which are contrary to the tenor of the document.”

7. In view of the above ruling of the Supreme Court, we are of the view that the Tribunal has rightly held that the assessee-company was the owner of the assets and is entitled to the depreciation allowances claimed by it for the concerned assessment years and we answer the first question referred to us in the affirmative and against the Revenue. This court in CIT v. Tamil Nadu Small Industries Development Corporation Ltd., [1991] 190 ITR 655 has taken a similar view.

8. With regard to the second question, learned counsel for the Revenue referred to the following rulings, to support his submission that interest earned by the assessee-company during the assessment years on short-term deposits was not the business income of the assessee-company:

(i) In Collis Line Pvt. Ltd. v. ITO, [1982] 135 ITR 390, a learned single judge of the Kerala High Court was of the view that where money was invested in a bank by the assessee, a shipping company, because the money was lying idle and it was safer and wiser to put it in a bank, the interest earned on the deposit would be incidental to the main purpose of the deposit, which was safe keeping and not earning of profits. Therefore, the interest earned cannot be said to be received in the course of business so as to make it part of the profits and gains of the assessee's business. It should be assessed as income from “other sources” and the assessee would not be entitled to set off the unabsorbed development rebate against that income under section 33 of the Income-tax Act, 1961.

(ii) In the case of Bokaro Steel Ltd. v. CIT (No. 2), [1988] 170 ITR 545 (Patna), the Patna High Court held that the interest on advances to contractors, rent from quarters let out to the employees of contractors, hire charges on plant and machinery let out to contractors and royalty on stones removed from the assessee's lands and miscellaneous receipts were not assessable as income; that since interest received by the assessee from contractors was not liable to tax, the interest received by the assessee-company from its own employees would also be not taxable; and that the Tribunal had found that surplus money not required for business had been kept in short-term deposits in banks. The bank deposits were not incidental to the business of the assessee nor were they incidental to the construction of the factory of the assessee. The interest on short-term deposits constituted income of the assessee and it was assessable under section 56 of the Income-tax Act, 1961, as income from other sources.

(iii) In the case of CIT v. Nagarjuna Steels Ltd., [1988] 171 ITR 663 (AP), the Andhra Pradesh High Court while answering the question whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the amount of Rs. 15,092 should not be considered for being taxed as revenue but had to be set off against interest payment of Rs. 7,79,297 and the balance alone had to be capitalised, held that where the object of the assessee is to do business and in the course of setting up a plant, since all the borrowed money is not required at once, it keeps such surplus funds in short-term deposits, the interest earned on such short-term deposits should be set off against the interest paid by the assessee on the loans obtained by it and the balance of the interest amount should be capitalised. Interest received on such short-term deposits is not assessable as a revenue receipt.

9. On the other hand, learned counsel for the assessee-company referred to the following rulings in support of his submission that interest earned on short-term deposits by the assessee-company during the assessment years was business income:

(i) In the case of CIT v. A.P Industrial Infrastructure Corporation Ltd., [1989] 175 ITR 361 (AP), the Andhra Pradesh High Court while answer-ing the questions whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal was justified in holding that the income derived from the letting out of sheds owned by the assessee should be assessed as income from business and whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal was justified in holding that the interest income derived from banks should be assessed as income from business, held that the income derived from letting out sheds owned by the assessee was assessable as income from business.

(ii) The Delhi High Court, in the case of Snam Proghetti S.P.A v. Addl. CIT, [1981] 132 ITR 70, while answering the question that arose for consideration 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, held that the assessee had not come from Italy to make bank deposits in India, but had come to carry on business, and the income earned by it by depositing spare funds in banks and earning interest thereon would also be business income and for the purpose of set-off it could not be treated as separate from business income. Therefore, the loss brought forward from the assessment year 1970–71 had to be set off also against the interest income for the assessment year 1971–72.

(iii) It was held by this court in Addl. CIT v. Madras Fertilisers Ltd., [1980] 122 ITR 139, as follows (headnote):

“In order to meet the cost of construction of its plant the assessee entered into a loan agreement with a bank in America. The agreement, inter alia, required the company to deposit the proceeds of the loan in a special account to be maintained with the bank until all the funds deposited therein have been applied by the company in connection with the project. The assessee's claim for deduction of the amount of interest paid by it on its borrowings was negatived by the officer. The officer, however, took note of the interest received by the assessee. The Commissioner in revision held that the claim of the assessee to deduct the interest paid by it on its borrowings could not be adjusted against the interest received by it on its deposits as the payment of interest had no connection with the earning of interest. On appeal, the Tribunal held that the interest paid by the assessee to the lending bank proportionate to the amount on which it earned interest should be allowed under section 57(iii) of the Income-tax Act. On a reference, the High Court held, (i) that the interest received by the assessee on its deposits in the special account constituted its income; (ii) that though the setting up of a factory might be a pre-liminary and essential step for the purpose of carrying on the business of the assessee, it could not be said to be carrying on the business itself.”

(iv) The Supreme Court in CIT v. Calcutta National Bank Ltd., [1959] 37 ITR 171 : AIR 1959 SC 928 has observed as follows (at page 178):

“The term ‘business’ is a word of very wide, though by no means determinate, scope. It has rightly been observed in judicial decisions of high authority that it is neither practicable nor desirable to make any attempt at de-limiting the ambit of its connotation. Each case has to be determined with reference to the particular kind of activity and occupation of the person concerned. Though ordinarily ‘business’ implies a continuous activity in carrying on a particular trade or avocation, it may also include an activity which may be called, ‘quiescent’.”

10. Upon the facts of the case, the Supreme Court held that the realisation of rental income by the assessee-bank, was in the course of its business in the prosecution of one of the objects in its memorandum; it was, therefore, liable to be included in its business profits.

11. Following the above ruling of the Supreme Court, we are of the view that the term “business” is a word of very wide connotation and by no means determinate in its scope and has to be considered with reference to each particular kind of activity and occupation of the person concerned. Upon the peculiar facts of this case, we are of the opinion that the interest accrued on short-term deposits of the assessee-company which were made out of the business funds available with the assessee-company before the same were utilised for actual business and, as such, the same is incidental to the business activity of the assessee-company and as such, the interest on the short-term deposits should be treated as business income. We, therefore, answer the second question referred to us in the affirmative and against the Revenue. Reference answered accordingly. There shall be no order as to costs.