Uday Sinha, J.:— These are two references under section 256(1) of the Income-tax Act, 1961 (hereinafter referred to as “the Act”). They relate to the assessment year 1972-73. Taxation Case No. 41 of 1978 is at the instance of the assessee and Taxation Case No. 42 of 1978 is at the instance of the Revenue. The Income-tax Appellate Tribunal was seized of fourteen appeals bearing Nos. 1537 to 1543 (Pat) and Nos. 1463 to 1469 (Pat) of 1973-74. They were all disposed of by a common judgment. Those appeals gave rise to fourteen references to this court which were numbered as Taxation Cases Nos. 34 to 47 of 1977. Taxation Cases Nos. 34 to 40 of 1977 were at the instance of the Commissioner of Income-tax, Bihar-II, Patna, while the other cases were at the instance of the assessee. Those references were disposed of by a Bench of this court presided over by S.K Jha and A.K Sinha JJ., [1988] 170 ITR 522 (supra). All the questions referred to in those references were answered in favour of the assessee and against the Revenue. In the present references, all except one are common to the earlier cases disposed of by the earlier Bench by judgment dated August 7, 1987. For that purpose, I must set out the questions referred to us. A consolidated reference has been made to us, at the instance of the Revenue as well as the assessee. The questions referred at the instance of the assessee are the following:
“(1) Whether, on the facts and in the circumstances of the case, the receipts arising from the letting out of the quarters to the outsiders, such as employees of the contractors engaged in the construction of the plant can be treated as the income of the assessee and/or, in any event, should be adjusted against the cost of construction so as to reduce such cost?
(2) Whether, on the facts and in the circumstances of the case, the receipts from the letting out of the properties to outsiders, such as the employees of the contractors engaged in the construction of the plant are to be assessed as income from property under section 22 of the Income-tax Act, 1961, or the said income should be assessed under section 28 of the Income-tax Act, 1961, as business income or in any event, under section 56 of the Income-tax Act, 1961, as income from other sources?
(3) Whether, on the facts and in the circumstances of the case, the interest received by the assessee from sums advanced to its own employees is liable to be assessed as income from other sources in the hands of the assessee or whether, on the facts and in the circumstances of the case, such interest would reduce the cost of construction of the assessee and should not be treated as income chargeable to tax?
(4) Whether, on the facts and in the circumstances of the case, the interest received from the bank on short-term deposits is liable to be assessed as the Income of the assessee or such interest should reduce the cost of construction of the assessee and, therefore, would not constitute the income of the assessee?”
2. The questions referred at the instance of the Revenue are the following:
“(1) Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in holding that interest received, by the assessee-company on the amounts advanced to contractors was not taxable?
(2) Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in holding that the hire charges received by the assessee-company for letting out plant and machinery to contractors were not taxable?
(3) Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in holding that the royalty received by the assessee-company for allowing contractors to raise stone chips from company's land, was not taxable?
(4) Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in holding that the miscellaneous receipts were not taxable?”
3. Two of the questions referred to this court read as follows:
“(1) Whether, on the facts and in the circumstances of the case, the receipts arising from the letting out of the quarters to outsiders, such as employees of the contractors engaged in the construction of the plant, can be treated as the income of the assessee and/or, in any event, should be adjusted against the cost of construction so as to reduce such cost?
(2) Whether, on the facts and in the circumstances of the case, the receipts from the letting out of the properties to outsiders, such as, the employees of the contractors engaged in the construction of the plant are to be assessed as income from property under section 22 of the Income-tax Act, 1961, or the said income should be assessed under section 28 of the Income-tax Act, 1961, as business income or, in any event, under section 56 of the Income-tax Act, 1961, as income from other sources?”
4. These very questions form questions Nos. (1) and (2) on behalf of the assessee in the present references. In relation to the assessment year 1970-71, the first question related to the receipt of interest by the assessee-company on the sums advanced to the contractor. The answer given by this court in the earlier case was that they were not taxable. In the present case, question No. (3) at the instance of the assessee is whether interest received by the assessee from the sums advanced by it to its own employees was liable to be assessed as income from other sources in the hands of the assessee or whether such interest would reduce the cost of construction of the assessee and should not be treated as income chargeable to tax. On a parity of reasoning, the answer to the third question referred to us at the instance of the assessee must be answered in the same terms as in the earlier taxation cases. 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 not be taxable. This question is thus answered in the same terms as in the earlier cases. Question No. (4) on behalf of the assessee, quoted above, is the only question not covered by the earlier decision of this court. So far as the questions referred at the instance of the Revenue in these references are concerned, they are all covered by the earlier decision of this court. We see no reason to take a different view of the matter; Relying upon the earlier decision of this court, I hold that the Tribunal was right in deciding all but one question in favour of the assessee and against the Revenue. The references in regard to those questions are accordingly answered.
5. As stated earlier, the only question not covered by the earlier decision related to interest received by the assessee from banks on short-term deposits. The stand of the assessee was that those sums would reduce the cost of construction of the assessee and was, therefore, not liable to income-tax.
6. The assessee is a Central Government undertaking wholly owned by the Government of India. It received sums from Government. Those sums used to be deposited in banks on short-term deposits and earned interest thereon. The question is will it be income or not? Learned senior standing counsel for the Income-tax Department contended that it would clearly be income liable to tax. He relied upon Madhya Pradesh State Industries Corporation Ltd. v. CIT, [1968] 69 ITR 824 (MP). The assessee in this case was Madhya Pradesh Industries Corporation Ltd., a Government private limited company. It was incorporated on April 11, 1961, for taking over and running certain concerns of the Government of Madhya Pradesh. The shares of the company were held by the Government of Madhya Pradesh, the Madhya Pradesh Electricity Board, and the Director of Industries, Madhya Pradesh Government. During the assessment year 1962-63, the accounting year of which ended on March 31, 1962, the Company did not actually carry on any business; there was also no production. That was a period of capital expenditure and installation of machinery and plant. The share money which the company received from the Madhya Pradesh Government being not immediately required by it, was deposited in call-deposits in certain banks. On these deposits, the company received during the accounting year a total amount of Rs. 20,763.92 as interest. The company showed this amount of interest as “cash and bank balances” in its accounts. In the profit and loss account, the amount was shown as “interest on deposits”. In the return of income for the assessment year in question, the assessee showed a total loss of Rs. 15,110. Before the Income-tax Officer the assessee contended that being a newly established undertaking, it did not have income liable to tax, and that further the interest receipts should be assessed as income from business as it was authorised to do money-lending business also under clause 13 of the memorandum of association. The Income-tax Officer held that though the company was authorised to do money-lending business, the interest received by it on deposits from the banks was not income received from money-lending business. He treated the interest income as income from “other sources” under section 56 of the Act. No doubt, he allowed deduction of a part of the expenses incurred in earning this interest income. In those circumstances, the question referred to the High Court was as follows:
“Whether, on the facts and in the circumstances of this case, the sum of Rs. 20,856 received by way of interest by the assessee should be taxed under section 28 as business income or under section 56 as income from ‘other sources’?”
7. The Madhya Pradesh High Court held that the moneys deposited by the company with the bank were plainly not in the ordinary course of its business of making investment under sub-clause 20 of clause III of the memorandum of association or article 72(1) of the articles of association. It was merely a transaction relating to share capital and not an act in the course of its business. The High Court observed as follows (p. 829):
“If, therefore, the deposits made by the assessee in a certain bank did not constitute any business of the company, then it follows that the interest earned by the assessee on those deposits cannot be regarded as income under the head ‘Profits and gains of business or profession’ under section 28 of the Act.”
8. The situation in the present case is similar. The earning of interest from banks was not in the ordinary course of the assessee's business and it was, therefore, liable to tax.
9. The decision of the Madhya Pradesh High Court was considered and followed by the Kerala High Court in Traco Cable Company Ltd. v. Commissioner Of Income-Tax, Ernakulam, [1969] 72 ITR 503. That was a case where the object of the company was manufacture and sale of all types of electric wires, cables, etc. It obtained the certificate of commencement of business on July 30, 1961. It had a collaboration arrangement with a Canadian company. On September 24, 1962, the directors submitted their report for the year ending March 31, 1962. It was stated in that report that the Kerala Government had issued orders for acquisition of 46 acres of land for the use of the company and that the collaborating company had commenced preliminary work on the project. The preparation of the design and blue-print for the machinery had been taken on hand. The company was expected to go into production before the end of 1963. The assessee had collected share capital and the amount therefrom was deposited by it in banks. The company earned a sum of Rs. 68,013 as interest on the deposits. The assessee incurred expenditure during the same period of Rs. 34,000 by way of salary and wages of its employees, printing, stationery, postage, etc. Article 3 of the memorandum of association of the assessee enumerated its objects and clause (v) there of read as follows:
“To invest and deal with the funds of the company not immediately required upon such security and in such manner as may from time to time be determined.”
10. In the assessment for the assessment year 1962-63, the assessee claimed that the deposit of the share capital was carried on by the company, as empowered by the clause mentioned above. The claim was rejected by the Income-tax Officer. The assessee had claimed Rs. 34,139, mentioned above, as an allowable deduction. The assessee company further contended that even if the bank interest was not income from business, it was entitled to deduct the said expenditure under section 57 of the Act. This was also rejected by the Appellate Assistant Commissioner and the Tribunal. A reference having been made to the High Court in regard to the receipt of interest from bank deposits, the Kerala High Court rejected the contention of the assessee in the following words (p. 505):
“But the short question for decision in this case is whether, as a matter of fact, the company carried on such a business during the accounting year concerned. All that it did was to deposit in banks the share capital received by the company instead of keeping it in its own safe. This was done because the company had not commenced business and the amounts were not immediately required for any business. The receipt of income by interest was only incidental or consequential to the deposit. It can hardly be contended that if an individual, who carries on any business other than a business of banking or dealing in money, deposits his surplus funds in a bank and receives interest thereon, the interest thus received would be income from business. The position cannot at all be different if the assessee happens to be an incorporated company instead of an individual. On the facts of this case, the finding of the Tribunal that the deposit of the share capital by the company in banks was not a business carried on by the company is perfectly right. Learned counsel for the Revenue brought to our notice a decision of the Madhya Pradesh High Court in Madhya Pradesh State Industries Corporation Ltd. v. CIT, [1968] 69 ITR 824. This decision fully supports the view we have expressed above.”
11. The decision of the Kerala High Court with which I am inclined to agree supports the stand of the Revenue. The same view was taken by a single Judge of the Kerala High Court in a writ application: Collis Line Pvt. Ltd. v. ITO, [1982] 135 ITR 390.
12. The assessee is a steel factory. The finding of fact recorded by the Tribunal is that the income was interest earned by utilising the surplus money, wherever it was not required in the business. It was not expenditure to reduce the cost of construction. It would thus obviously be “income from other sources” covered by section 56 of the Income-tax Act.
13. Learned counsel for the assessee, on the other hand, contended that the interest received from banks was not income chargeable to tax at all. Reliance was placed by him upon the decision of the Supreme Court in Nalinikant Ambalal Mody v. S. A.L Narayan Row, CIT, [1966] 61 ITR 428. I regret, the reliance placed is misplaced. In order to bring out the difference between the case before us and the case before the Supreme Court, some facts need be stated. In the case of Nalinikant Ambalal Mody, [1966] 61 ITR 428 (SC), the assessee was an advocate of the Bombay High Court till March 1, 1957, when he was elevated to the Bench of that court. Before elevation, his income was being assessed as income from profession. The assessee had some outstanding dues from his erstwhile clients the fees for which he received after his elevation during the calendar years 1958 and 1959, during no part of which he had carried on any profession. The assessee contended that the sums received as fees for work done as lawyer were not income from profession and was, therefore, not liable to tax. The Revenue, on the other hand, contended that although it could not be taxed as income from profession, since the assessee had ceased to be a lawyer, it could certainly be assessed as income from the residuary head “Income from other sources” mentioned in section 6(v) of the Indian Income-tax Act, 1922. The central question, therefore, was whether an income which does not fall under any other could be assessed under the residuary head “Income from other sources”. In that connection, Sarkar C.J, with whom Mudholkar J. concurred (Bachawat J. dissenting), observed that the several heads mentioned in section 6 were mutually exclusive. In that connection, his Lordship observed that an item of income cannot change its character with the passage of time and an income which specifically falls under one category cannot be assessed to tax under the residuary head. In that connection, his Lordship observed as follows (p. 431):
“As to the general principles, we first observe that as the heads of income are mutually exclusive, if the receipts can be brought under the fourth head, they cannot be brought under the residuary head. It is said by the Revenue that as the receipts cannot be brought to tax under the fourth head, they cannot fall under that head and must therefore fall under the residuary head. This argument assumes, in our view, without justification, that an income falling under one head has to be put under another head if it is not chargeable under the computing section corresponding to the former head. If the contention of the Revenue is right, the position would appear to be that professional income of an assessee who keeps his account on the cash basis would fall under the fourth head if it was received in a year in which the profession was being carried on, but it would take a different character and fall under the residuary head if received in a year in which the profession was not being carried on. We are unable to agree that this is a natural reading of the provisions regarding the heads of income in the Act. Whether an income falls under one head or another has to be decided according to the common notions of practical men for the Act does not provide any guidance in the matter. The question under which head an income comes cannot depend on when it was received. If it was the fruit of professional activity, it has always to be brought under the fourth head irrespective of the time when it was received. There is neither authority nor principle for the proposition that an income arising from a particular head ceases to arise from that head because it is received at a certain time. The time of the receipt of the income has nothing to do with the question under which particular head of income it should be assessed.”
(emphasis* has been supplied by me)
14. In the case before us, the interest from bank deposits were never income from business. They were never incidental to the business of the assessee. If the income had been incidental to the business of the assessee at any point of time, the time of receipt would not have made any difference. That would not change the character of the income. In that situation, the income would have remained income from business and would not be thrown under the head of the residuary item “income from other sources”. It is well established that a source of income cannot be brought under the residuary head, if it comes under any of the specific heads. In the instant case, the income from bank deposits was never income from business. It would, therefore, fall in the category of section 14(f) “income from other sources” and computed in terms of section 56(1) of the Income-tax Act, 1961.
15. Learned counsel for the assessee then placed reliance upon the decision of the Supreme Court in Challapalli Sugars Ltd. v. CIT, [1975] 98 ITR 167. In that case the question was whether payment of interest before the commencement of production on amounts borrowed by the assessee represented an element of the actual cost of machinery, plant, etc., and as such whether depreciation allowance and development rebate was admissible on interest paid by the assessee. The Supreme Court observed that the accepted accountancy rule for determining cost of fixed assets is to include all expenditure necessary to bring such assets into existence and to put them in working condition. In case money is borrowed by a newly started company which is in the process of constructing and erecting its plant, the interest incurred before the commencement of production on such borrowed money can be capitalised and added to the cost of the fixed assets created as a result of such expenditure. The question thus before the Supreme Court in that case was entirely different. This case, therefore, cannot be of any assistance to the assessee.
16. Learned counsel for the assessee then placed reliance upon Addl. CIT v. Indian Drugs and Pharmaceuticals Ltd., [1983] 141 ITR 134 (Delhi). The facts of that case were absolutely different. During the assessment year in question, in that case, the plant and machinery was in the process of installation. The business had not been set up and none of the units had commenced production. The assessee realised Rs. 40,540 by the supply of tender forms regarding construction and erection of plant and machinery to contractors by sale of grass, stones and boulders, which was consequential to the land being cleared for the construction of the factory. The Income-tax Officer held those sums as “Income from other sources.” The Tribunal held that the receipts resulted in reducing the cost of construction and erection and should be treated as deduction from such cost and not as revenue receipts. It also held that the receipts on account of the sale of trees, grass, stones and boulders were in connection with the clearance of the land to be used for the erection of the factory. The receipts were thus directly related to the capital structure of the business which was being set up, and that was inextricably linked with the process of setting up the business. The situation in the case before us is entirely different. Here the finding of the Tribunal is well founded that the interests received from bank deposits were not incidental to the construction of the factory. It was not derived by any activity which was part and parcel of constructional activity. In that situation, the decision of the Delhi High Court is not in pari materia with the one before us. The two cases are distinguishable on facts.
17. Lastly, learned counsel for the assessee placed reliance upon D.L.F Housing and Construction (P) Ltd. v. CIT, [1983] 141 ITR 806 (Delhi). That was a case where the assessee was a housing and construction company. It carried on the business of colonisation, i.e, it used to purchase lands situate in villages contiguous to the city of Delhi and sell them as commercial or residential plots. During 1950 to 1956, the assessee purchased land in two villages and developed them into a residential colony. Subsequently, during October 26, 1956, to April 4, 1957, the assessee also purchased about 300 bighas and odd agricultural land and raised a farm thereon. The land was shown by the assessee in its accounts under the head “Stock-in-trade”. No steps were taken by the assessee to develop any part of those 300 bighas and carve out plots. Out of the lands owned by the assessee, nearly 300 bighas were acquired and compensation of Rs. 7,90,540 was paid to the assessee during the accounting year ending September 30, 1980, resulting in a profit of Rs. 1,65,660. The question was whether it was a trading asset or it was a capital receipt exempted from taxation. The Delhi High Court held that since at no stage the assessee had made any attempt to convert or alter the character of the land and had used it for agriculture alone, it was not a trading asset and the compensation received was a capital receipt and the profit resulting therefrom was not assessable to tax as profit of the assessee's business. The question thus before the Delhi High Court was whether the income was capital receipt or profit of the assessee's business. The conclusion of the Delhi High Court being that it was a capital receipt, the natural corollary would be that it would not be liable to tax. In the case before us, it has not been contended on behalf of the assessee, and in my view rightly, that the interest from bank deposits were capital receipts. Not being capital receipts, they must be treated as income of the assessee. It cannot be income from business as the receipt was not incidental to the business of the assessee. It had, therefore, to be assessed as “income from other sources”. The Tribunal was thus right in holding, in the facts and circumstances of the present case, that the income from bank deposits was liable to tax. Since that income was not incidental to the construction of the assessee, it would not reduce the cost of construction of the assessee. In my view, therefore, the interest received would constitute income of the assessee assessable in terms of section 56 of the Act. For the reasons stated above, I am of the view that the fourth question referred to us for our opinion in regard to interest income from bank deposits must constitute income of the assessee. That question, therefore, must be answered in favour of the Revenue and against the assessee. The other questions, either at the instance of the assessee or of the Revenue, must be answered in favour of the assessee and against the Revenue. The references are disposed of accordingly. Since most of the questions have been decided in favour of the assessee, there shall be no order as to costs.
18. Let a copy of this judgment be transmitted to the Assistant Registrar, Income-tax Appellate Tribunal, in terms of section 260 of the Income-tax Act, 1961.
S.B Sanyal, J.:— I agree.