Kapur, J.:— M/s. Snara Progetti, S.P.A, is an Italian company carrying on business as engineers and contractors in the field of petroleum and petro-chemical plant at Milan in Italy. The petitioners commenced to do business in India from the year 1967, and for the purpose of Indian income-tax it is to be taxed as a company under s. 2(17)(ii) of the I.T Act, 1961 (hereinafter referred to as “the Act”)
2. In the assessment years 1968-69, 1969-70 and 1970-71, the petitioner was assessed to income-tax as follows:
(i) In the year 1968-69—business income—Rs. 53,63,899 and interest income—Rs. 8,60,499, making a total of Rs. 62,24,398.
(ii) In the year 1969-70—business income—Rs. 97,86,013 and interest income—Rs. 12,90,343, making a total of Rs. 1,09,76, 356.
(iii) In the year 1970-71 there was a business loss of Rs. 1,28,88, 820 and interest income was Rs. 6,56,310 making a net loss of income of Rs. 1,22,32, 510.
3. 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?”
4. 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.
5. It became material to determine the quantum of carry forward loss from the previous year for the purpose of set off against the profits, and it was also material to find out if the sum of Rs. 5,39,037 which was interest income had also to be set off against the previous loss. As stated above, this question was not material in 1970-71, because there can be a set-off under two heads in the same year but in case of carry forward loss the set-off can be only against the same head of income.
6. The assessment order for the year 1971-72 was made by the ITO, Company Circle, on January 22, 1973. The ITO stated as follows:
“Statutory income is computed as under:—
Rs. Lube India Ltd., for technical services 1, 99, 978 Profits from business 29, 73, 145 Income from other sources (bank interest tax deducted at source Rs. 14,639) 5,39,037 Total income assessed 37,12,160
Assessed. Issue demand notice, etc., after adjusting previous losses. Give credit of Rs. 14,639 of tax deducted at source. Penalty notice for default under section 273 have already been issued. Charge interest under section 215.
(Sd) Dhera Singh Income-tax Officer, Company Circle XI, Dt. 22-1-1973 N. Delhi.”
7. The ITO significantly did not state the amount of losses which were being adjusted but merely stated that the adjustment should be made. On the other hand, the concluding words concerning the penalty notice, etc., would show that he had in mind that advance tax had not been paid; which would only be so if there was assessable income.
8. The petitioner's revision to the Commissioner under s. 264 of the Act was decided on March 4, 1974. It had been urged before the Addl. Commissioner that there was nothing stated in the assessment order showing that the carry forward losses had to be adjusted only against income arising from technical services or business profits and not against interest income. The assessee's claim was that there was a mistake in the demand notice accompanying the assessment order. However, in this respect, there was a note on the office copy of the assessment order, and the revision was rejected on the ground that the order of the ITO was quite clear.
9. In the order passed in revision, the claim of the assessee that the interest income should also be treated as business income was rejected, though a reference was made to a number of cases, 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.
10. 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?
11. It is convenient to take up the second point first. It is significant that the words used by the ITO are very terse and not fully comprehensible. They could be misunderstood. However, the intention of the order does not appear to be to give a set-off of previous losses even against interest income. The words “issue demand notice, etc., after adjusting previous losses” may be ambiguous, but the subsequent words show that some tax has been imposed. These words are:
“Give credit of Rs. 14,639 of tax deducted at source. Penalty notice for default under section 273 has already been issued. Charge interest under section 215.”
12. The default notice under s. 273 can be issued only when there is a failure to pay advance tax. If total set-off had been given, then there would be no question of issuing a default notice. Secondly, the interest mentioned in s. 215 of the Act is payable only when there is a shortfall in the payment of advance tax. If the total income had been set off against the previous losses, then there would be no question of charging interest under s. 215. There is, therefore, no doubt that the ITO did not mean to give a complete adjustment against the carry forward losses, and he did not in fact make this adjustment, although he does not say so in clear words. It may be said for the assessee that it could have been misled by the order but the demand notice would give’ the true position. The assessee could not, therefore, legitimately urge that there was an error in that demand notice. Annexure “BB” is a copy of the notice of demand which was issued along with the assessment order. That notice divides the income into business income and income from other sources and grants the adjustment only in respect of business income. The notice also shows that Rs. 3,357.35 was payable as income-tax, after giving adjustments, and the most important point is that after considering the previous carry forward loss a sum of Rs. 90,593,87 was carried forward for yet another year which would be for the assessment year 1972-73.
13. In view of this discussion, the second point urged in support of this petition appears to be without foundation. It is, therefore, necessary to turn to the other question.
14. The main question for decision is whether the “interest income” could be treated as “business income The answer to this question has to depend on how we are to consider the interest income 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 setoff 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 legal position is not in dispute. The question in the present case is whether the interest income itself can be treated as business income. For this purpose, the various decisions cited before the Addl. Commissioner were very material. In CIT v. Cocanada Radhaswami Bank Ltd., [1965] 57 ITR 306 (SC), the question was whether the income derived from securities by a bank, which would otherwise be “income from other sources”, could be used for the purpose of adjustment against carry forward losses. It was held that as the securities form part of the trading assets of the bank, the income could be set off. In CIT v. Chugandas and Co., [1965] 55 ITR 17 (SC), the question before the court was whether the assessee was entitled to the benefit of s. 25(3) of the Indian I.T Act, 1922, in respect of interest on securities. It was concluded that the section did not apply to non-business income. However, the securities, in this case, were held to constitute the stock-in-trade of the business and, therefore, the income from securities was treated as equivalent to business income. In United Commercial Bank Ltd. v. CIT, [1957] 32 ITR 688 (SC), it was held on a case, very similar to the present that the interest on securities derived by the United Commercial Bank Ltd. could be set off against losses. The question had arisen in this way. Interest on securities for the assessment year in question was quite substantial but there was a loss under the head” Business income”. The net income was Rs. 14,95,826. This net income was interest income minus business loss. In the year previous to this there was a net loss of Rs. 3,21,929 which was claimed to be set off against the aforementioned net income. The ITO rejected the claim for set-off on the ground that the net income was not income from business but from securities. The assessee appealed unsuccessfully up to the Tribunal and then on a reference to the High Court it was held that the income from securities and the income from banking business were under two separate heads, and so there could be no set off. On further appeal to the Supreme Court, the assessee succeeded. The plea which was accepted by the Supreme Court was that though the interest income was to be assessed under s. 8 of the Act and the business income under s. 10 of the Act, still a set-off could be given under s. 24(2) of the Act. (Those references are to the 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 a 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.
15. If a person runs a bank or other bunsiness 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.
16. To revert again to the United Commercial Bank's case [1957] 32 ITR 688 (SC), the bank which had funds deposited with it by its customers and its own capital, could utilise the funds either by lending the same to others or by making various investments. Indeed, in the case of banks, it is compulsory to place some of the funds in securities. The question that would then arise would be whether the interest income is not also a part of the banking activity. If it is, then notwithstanding the fact that the charge of income-tax is under the head “Interest on securities”, the income would be from banking and not from mere investment. In the present case, the assessee claimed that it has funds which it derived from business and which are used only in business and for no other purpose. If they are spare funds, then they are deposited in banks and, hence, it is clear that this income is also business income. To repeat what was said earlier, the company has not come from Italy to make bank deposits in India but has come to carry on business. If at any time it has spare funds it prefers not to keep the same idle but makes deposits in banks which give some income. This also is, therefore, business income, and for the purpose of set-off has not to be treated as separate from business income. The judgments just referred to give full support to the petitioner. Therefore, we are of the view that set-off had to be granted and could not be refused merely because interest income is taxed under a separate head.
17. We would thus allow the petition and grant the prayer of the petitioners. We would hold that the income from interest on bank deposits is also business income for the purpose of set-off. In the circumstances of the case, particularly we note that the contractor is engaged in very large contracts. The rejoinder affidavit shows that there is a contract with Tata's Mithapur, Gujarat, for 250 million £, one with Coromandel Fertilisers for 200 million £, one at Nangal Expansion, Haryana, for 30 million £, one for Hindustan Lever for 300 million £, one which is described as a modifications in MRL for 15 million £ and for setting up a refinery in Turkey jointly with some other Indian concern is for 200 million £. These huge contracts would show that very large funds will have to be available with the petitioner from time to time. It would, therefore, necessitate the peti-tioner having large liquid funds at times and a businessman placed in such a situation would normally try to get some interest on such deposits and the same would be considered as business income. We would, therefore, hold that set-off as claimed has to be allowed even against interest on securities. However, in view of the nature of the case, we leave the parties to bear their own costs.
Petition allowed.
Comments