JUDGMENT H.L. Dattu, J.

1. At the instance of the Revenue, the Tribunal has referred the following questions of law, which according to him, would arise out of the order passed by the Income-tax Appellate Tribunal, Bangalore Bench, Bangalore, in I.T.A. Nos. 594-596 of 1992 and 1048, 1049 and 1050 of 1991, for our consideration and opinion.

2 The parties to these proceedings are common. The assessment years are 1986-87, 1987-88 and 1988-89, respectively.

3 In I.T.R.C. Nos. 280, 281 and 282 of 1998, the question of law referred for our consideration and opinion is:

Whether, on the facts and circumstances of the case, the Tribunal was right in holding that interest received by the assessee on the surplus funds kept with banks as short-term deposits should be treated as business income ?

4. In I.T.R.C. Nos. 284 and 285 of 1998, the following question of law is referred for our consideration and opinion:

Whether, on the facts and circumstances of the case, the Tribunal was right in holding that presentations could not be considered to serve the purpose of advertisement of the products of the assessee when there was no logo of the assessee-company attached to the articles presented when Rule 6B does not specify that presentation articles carrying the logo of the company only would be treated as serving the purpose of advertisement?

5. In I.T.R.C. No. 283 of 1998, both questions of law which we have noticed earlier would arise for our consideration and opinion.

6. The relevant facts are:

The assessee is a private limited company engaged in the business of export of processed food items. The assessee had received some amounts from its foreign customers by way of advance in respect of the exports to be made by it. The advance amounts so received were kept by the assessee in short-term deposits with the banks and had received interest income out of those deposits. The assessee had treated the interest receipts on the short-term deposits made in the bank as a part of business income and had claimed deduction under section 80hhc of the income-tax act 1961 ("the act" for short), in respect of its income from export business in its income-tax returns filed for the assessment years 1986-87, 1987-88 and 1988-89 before the assessing authority. The assessing authority, while computing the tax liability of the assessee under the Act had negatived the aforesaid claim, and had treated the interest income earned as "income from other sources .

7. In the appeals filed, the Commissioner of Income-tax (Appeals), after accepting the claim made by the assessee, that the interest income received by the assessee on the surplus funds kept with the banks as short-term deposits should be treated as business income, has allowed the appeals and further has issued a direction to the assessing authority to treat the interest income as business income and to recompute the deduction under Section 80HHC of the Act.

8. In the appeals filed before the Income-tax Appellate Tribunal, the primary contention of the Revenue was, that the interest income earned by the assessee must be considered as "income from other sources", since the interest income earned has no nexus with the main activity of the assessee, namely, export business, and therefore, the first appellate authority was not justified in allowing the appeals. It was the contention of the assessee's representative that the interest income earned from the. Short-term deposits made in the banks by depositing the advance amounts received from the foreign buyers towards the exports to be made by the assesses-company should be treated as business income of the assessee since the interest earned on short-term deposits was out of the funds lying temporarily surplus with the assessee.

9. The Tribunal while rejecting the Department's appeals is of the view, that the interest income was generated by way of keeping the advance amounts received by the assessee during the course of its regular business activity in the form of short-term deposits in the banks and therefore, it cannot be denied that the interest derived from such short-term deposits arose to the assessee during the course of its normal business activity, and therefore, the interest income earned by the assessee has to be considered as business income of the assessee only, and not as "income from other sources".

10. In so far as the claim made by the assessee for deduction of certain amounts spent for presentation of the articles to its customers and employees is concerned, the Assessing Officer taking into consideration the language employed in rule 6b of the rules had rejected the same and in the appeal filed, the Commissioner of Income-tax (Appeals), had allowed the assessee's claim on the ground, that, since no logo of the assessee's-company was attached to the articles presented, and therefore, advertisement of the company or its products was not involved in the presentation of articles and further, the presentation of the articles so made is for maintaining better relationship with its customers and employees and therefore, the assessing authority was not justified in disallowing the claim made by the assessee. On the same reasoning, the Tribunal has also rejected the issue raised in this regard in the appeals filed by the Department.

11. In these reference proceedings, the issues that require to be decided are, whether the interest income received by the assessee on the surplus funds kept with the banks as short-term deposits should be considered as income of the assessee from business or income from other sources ? Secondly, whether the presentation of articles by the assessee-company to its customers and employees is allowable expenditure as envisaged under Rule 6B of the Income-tax Rules, 1962 ?

12. Llearned Counsel for the Department, on the first issue would contend that under Section 80HHC of the Act, an Indian company or a non-corporate resident is granted deduction of profits derived from export out of India, if any goods or merchandise, other than those goods mentioned in the section itself, subject to fulfilment of prescribed conditions and since the interest income earned from short-term deposits made in the banks is not derived from export of goods or merchandise, no deduction in respect of such item is available under Section 80HHC of the Act. Alternatively, it is contended by learned Counsel, that since the main activity of the assessee-company is export business, the interest income earned from short-term deposits in the banks cannot be considered as business income and therefore, the same requires to be brought under the head "Income from other sources". In aid of this submission, learned Counsel has invited our attention to the observations made by the apex court in the case of Tuticorin Alkali Chemicals and Fertilizers Ltd. V. CIT .

13. Per contra, Sri Parthasarathi, learned Counsel for the assessee-company would justify the findings and conclusions reached by the first appellate authority and the Income-tax Appellate Tribunal. Llearned Counsel in support of his contention has relied on the law declared by the various High Courts and reference to those decisions will be made while considering the submissions made by both learned Counsel.

14. To appreciate the contentions canvassed by the learned Counsel for the parties to the lis, some of the provisions of the Act which have bearing on the issue require to be noticed.

15. Section 14 of the Act classifies the chargeable income into various heads as distinguished from source of income. The apex court while considering the provisions of Section 14 of the Act in the case of Nalinikant Ambalal Mody v. S.A.L. Narayan Row CIT has observed that the provisions of this section are mandatory and therefore, income must be assessed only in accordance with this section. The nature and quality of income would be determined in accordance with commercial considerations, although the same will have to be assessed under a different head. If a receipt falls under one of the specific heads of income, then such receipt can be taxed only in accordance with the provisions relating to that head. However, merely because for some reasons income is not chargeable to tax under the specific head, it cannot be taxed under the residuary category of "income from other sources".

16. Section 28 of the Act deals with profits and gains of business or profession. It enumerates different types of income chargeable to income-tax under the head "Profits and gains of business or profession". For charging the income under this head, the considerations that require to be fulfilled are, there should be a business or profession ; the business or profession should be carried on by the assessee ; and the business or profession should have been carried on by the assessee at any time during the previous year. All business receipts are not income and the real nature of the receipts has to be examined to find out whether it constitutes business income. If a transaction is in the assessee's ordinary line of business, there can be no difficulty that it is in the nature of trade but a difficulty would arise, where the transaction is outside the assessee's line of business. In such cases, it must depend on the facts and circumstances of each case, whether the transaction is in the nature of trade.

17. Section 56 of the Act speaks of income from other sources. It is the residuary head of income, which takes within its ambit any income, which does not specifically fall under any other head of income. When any receipt is in the nature of income, which cannot be specifically allocated to any of the heads of income such as salaries, income from house property, profits and gains of business or profession, capital gains, the same is brought to tax under the residuary head "Income from other sources".

18. Llearned Counsel for the assessee in aid of his submissions, has relied on the following decisions of the apex court and other High Courts. We intend to notice those decisions first, before, we advert to the fact situation in the present case and whether those decisions would assist learned Counsel for the assessee.

19. The apex court in Narain Swadeshi Weaving Mills v. Commissioner of Excess Profits Tax [ has noticed that interest income is assessable either as business income or as income from other sources, depending upon the activities carried on by the assessee. If the investment yielding interest is part of the business of the assessee the same would be assessable as business income but where the earning of the interest income was incidental to and not an outcome of the business carried on by the assessee, the same was assessable as income from other sources.

20. The Supreme Court in the case of CIT v. Govinda Choudhury and Sons , has observed, that if the interest is earned in a systematic and organised manner, the same is assessable as a business income under Section 28 of the Act. Where the business of the assessee is to lend money or where the activity is a systematic endeavour to earn interest by lending money or discounting bills of exchange, interest income or the discounting income would be assessable as business income. However, where interest cannot be brought to tax under any other head of income, the same would be assessable under the head "Income from other sources".

21. The High Court of Madhya Pradesh in the case of Madhya Pradesh State Industries Corporation Ltd. V. CIT and the Kerala High Court in the case of Collis Line P. Ltd. V. ITO have observed that where a company after its formation did not carry on any business but merely derived interest income on the share of money received by it, such interest income is assessable as "Income from other sources".

22. In the case of CIT v. L&T McNeil Ltd. , the Bombay High Court has held that where the business was not set up and interest was earned on capital, the interest income was held to be assessable as "income from other sources".

23. In CIT v. South India Shipping Corporation Ltd. , the Madras High Court has held that where there is nexus between the interest earned and the business activity of the assessee, the interest income would not be assessable as income from other sources, but would be taxable under the head "Income from business and profession".

24. In CIT v. Madras Refineries Ltd. , the Madras High Court while answering the specific issue, whether the interest on term deposits should be treated as business income, the court keeping in view the facts and circumstances of the case, has observed that the deposit made by the assessee in the bank is the capital employed, and that would become part of the capital of the new industrial undertaking and any income earned by the capital employed would automatically become the business income of the assessee and it cannot be treated as income earned from other sources.

25. In CIT v. East India Hotels Ltd. , the Calcutta High Court has observed that the deposits accepted by the company from the public and in turn depositing portion of the money in the bank under rule 3a of the companies (acceptance of deposits) rules, 1975, the interest earned is assessable as business income under the provisions of the Income-tax Act.

26. In CIT v. Tirupati Woollen Mills Ltd. , the Calcutta High Court has held that the funds utilised by the assessee in making fixed deposits with banks were business funds lying temporarily surplus with the assessee and therefore, assessable as business income and revenue expenditure could be deducted from it.

27. Now, coming to the decision relied on by learned Counsel for the Revenue, that was a case, where the company was incorporated on December 3, 1971, with the object of manufacturing heavy chemicals. For the purpose of setting up of the factory, the company had taken loans from various financial institutions and a part of the borrowed funds which were not immediately required by the company was kept invested in short-term deposits with banks and the Tamil Nadu Electricity Board. It had also given interest bearing loans to its employees to purchase vehicles.

28. The question for consideration before the court was that the interest derived by the assessee from the borrowed funds which were invested in short-term deposits with banks would be chargeable to tax under the head "Income from other sources" or would go to reduce the interest payable by the assessee from financial institutions, which would be capitalised after the commencement of commercial production.

29. The apex court in Tuticorin Alkali Chemicals and Fertilizers Ltd. V. CIT , while answering the question, has held as under (headnote):

that the company had surplus funds in its hands. In order to earn income out of the surplus funds, it had invested the amount for the purpose of earning interest. The interest thus earned was clearly of revenue nature and would have to be taxed accordingly. The accountants might have taken some other view but accountancy practice was not necessarily good law. This was not a case of diversion of income by overriding title. The assessee was entirely at liberty to deal with the interest amount as it liked. The application of the income for payment of interest would not affect its taxability in any way. The company could not claim any relief under section 70 or section 71 since its business had not started and there could not be any computation of business income or loss incurred by the assessee in the relevant accounting years. In such a situation, the expenditure incurred by the assessee for the purpose of setting up its business could not be allowed as deduction, nor could it be adjusted against any other income under any other head. Similarly, any income from a non-business source could not be set off against the liability to pay interest on funds borrowed for the purpose of purchase of plant and machinery even before commencement of the business of the assessee.

30. The gist of the aforesaid decision is, that where the assessee derived interest from borrowed funds invested in short-term deposits prior to the commencement of business, the said interest need not be utilised for discharging liability for payment of interest or borrowals, hence the principle of diversion by overriding title is not applicable and secondly, the interest derived from borrowed funds invested in short-term deposits prior to commencement of business is income from other sources assessable as such, and it would not go to reduce the interest payable on the term loans secured from financial institutions which would be capitalised after the commencement of commercial production.

31. Now, let us come back to the fact situation in the present case, to answer the issue posed and canvassed before us.

32. The assessee is a private limited company engaged in the business of export of processed food items. The assessee had received considerable amounts from its foreign customers by way of advance in respect of exports to be made by it The assessee instead of keeping the amount idle, had made short-term deposits in the bank and had received interest on such deposits. It was its claim before the assessing authority that the interest income should be considered as business income of the assessee and this claim had been negatived by the assessing authority, on the ground that the interest income earned has no nexus or proximity with the business activity of the assessee and therefore, had considered the interest income earned on short-term deposits under the head "Income from other sources".

33. It is now a well-settled position in law that what is business income and what is not business income has to be determined on the facts of each case. In the instant case, the main activity of the assessee is export business and not that of earning interest on short-term fixed deposits. If the earning of interest is connected with the carrying on of the assessee's business and if the fixed deposits are utilised in such a manner so as to provide a sufficiently perceptible link with the business activities of the assessee, there should be no objection to the treatment of the interest as business income. In the instant case, the deposits in the bank were made with the money received as advance in the export business. The amount so deposited is the amount paid by the foreign buyer by way of advance amount to the assessee for the part performance of the agreement for export of the goods. The assessee, instead of keeping that amount idle, since it did not require the same for its immediate business activity, had deposited that amount by way of short-term deposit in the bank and the amount so deposited is only the funds which it had received towards the export to be made by it and the amounts so deposited in the bank and the interest income derived because of such deposit have close link with the business activity of the assessee-company and therefore, in our opinion, the first appellate authority and the Tribunal were justified in holding that the interest on bank deposits was assessable as business income.

34. To answer the second issue referred for our opinion, some of the provisions of the income-tax act and the rules framed thereunder require to be noticed.

35. Section 37(3) of the Act provides for allowable deductions on expenditure incurred by the assessee on advertisement, or on maintenance of any residential accommodation including any accommodation in the nature of guest-house or in connection with travelling by an employee or any other person including hotel expenses or allowances paid in connection with such travelling to the extent and subject to conditions prescribed under the rules, wholly and exclusively for the purpose of business.

36. rule 6b of the rules deals with expenditure on advertisement. sub-rule (1) of rule 6b of the rules provides that the allowance in respect of expenditure on advertisement shall not, inter alia, in respect of articles intended for presentation, exceed the limits which are set out in that rule. The articles intended for presentation must be such articles, which advertise the company's products.

37. In the instant case, the Assessing Officer has disallowed the expenditure in respect of articles of presentation by applying rule 6b of the rules. However, the first appellate authority and the Tribunal have found that since the articles neither bore the name of the company nor its logo, they cannot be considered as meant for advertisement. The object of the advertisement by a company is to attract customers by making them know the products manufactured by them and the advantages it has over and above that of similar products manufactured by the other companies. The first appellate authority and the Tribunal as a matter of fact have found that the articles distributed by the assessee-company did not even bear the name or the logo of the company and they did not even have any advertisement value. In view of this finding by both the fact-finding authorities, we are of the view that the assessing authority was not justified in disallowing the expenditure claimed by the assessee on presentation of articles to its customers and employees.

38. However, learned Counsel for the Revenue, placing reliance on the observations made by the Supreme Court in the case of Smith Kline and French (India) Ltd. V. CIT and in the case of Eskayef v. CIT and the decision of this court in the case of Widia (India) Ltd. V. CIT , would contend that the presentation of articles and gifts by the assessee-company to its customers and employees is only for advertisement and merely because the logo of the company is not affixed on those articles would not make any difference and therefore, both the first appellate authority and the Tribunal were not justified in coming to the conclusion that the presentation of the articles cannot be considered to serve the purpose of advertisement of the products.

39. Per contra, Sri Parthasarathi, learned Counsel for the assessee would contend that the advertisement is different from compliment and there is no advertisement of the assessee's products when there is no logo affixed to the articles presented by the assessee to its customers and employees, and therefore, the Tribunal is justified in its findings and conclusion in this regard. In aid of his submissions, learned Counsel has relied on the observations made by the Allahabad High Court in the case of CIT v. S.P. Textiles Co. , the observations made by the Delhi High Court in the case of CIT v. Indian Aluminium Cables Ltd. (No. 2) [1990] 183 ITR 611 , and the observations made by the Bombay High Court in the case of CIT v. Allana Sons P. Ltd. .

40. In our view, the reliance placed by learned Counsel Sri Seshachala on the decision of the apex court in the case of Smith Kline and French (India) Ltd. V. CIT , would not assist the Revenue in any manner. That was a case where the Supreme Court, apart from others, was considering the claim of the assessee with regard to deductibility or otherwise of surtax levied on the profits of a company is deductible under Section 40(a)(ii) of the Act. The conclusion of the court was that the liability to pay surtax is held to be not deductible as a business expenditure under Section 37 of the Act.

41. In Eskayef v. CIT , the Supreme Court has concluded that the expenditure incurred by a pharmaceutical company on giving free samples to physicians by pharmaceutical company is held to be an expenditure in the nature of publicity and sales promotion and therefore, falls within the restrictive provisions of Section 37(3A) of the Act.

42. In Widia (India) Ltd. V. CIT (Karn), the facts were, the assessee had incurred expenditure in holding seminars and hotel and conveyance charges in connection therewith and in its return of income had claimed the deduction of the aforesaid expenditure. Since the same had been disallowed by the assessing authority and the Tribunal, the asses-see-company was before this court. This court after a detailed consideration of the facts and circumstances of the case, was pleased to hold that the expenditure incurred by the assessee-company is in the nature of an advertisement and for promoting the sales of the assessee's products, and therefore, it attracts the provisions of Section 37(3A) of the Act.

43. Sri Parthasarathi, learned Counsel for the assessee-company, while contending that the amount spent on purchase of articles for presentation to its customers and employees is not an amount spent on publicity or advertisement so as to fall within the provisions of rule 6b of the rules, has relied on the observations made by the Allahabad High Court in the case of CIT v. S.P. Textiles Co. . That was a case, where a finding had been recorded by the Tribunal that the assessee has incurred expenditure on purchase of articles intended for distribution among selected purchasers and was not spent on publicity. Agreeing with the finding of fact reached by the Tribunal, the court was pleased to hold that the amount was not spent on publicity or advertisement so as to fall within the provisions of rule 6b of the rules.

44. The Bombay High Court in the case of CIT v. Allana Sons P. Ltd. , a case where the facts are more or less similar to the present case before us, has observed that where the presentation articles did not bear either the name of the assessee-company nor its logo, such articles could not be considered as meant for advertisement and therefore, rule 6b of the rules would not be attracted.

45. In our view, having gone through each one of the case law cited by learned Counsel for the Revenue, the same are not applicable to the facts and circumstances of the present case. Secondly, in view of the facts noticed by the Tribunal, the provisions of rule 6b of the rules cannot be applied to the expenditure incurred by the assessee for purchase of articles to its customers and employees.

46. In the result, the questions of law referred for our opinion require to be answered in the affirmative, i.e., in favour of the assessee and against the Revenue. Reference proceedings are disposed of accordingly. Ordered accordingly.