Commissioner Of Income-Tax v. Lok Holdings

R.S Mohite, J.:— This appeal has been filed by the Revenue on the footing that there arise three substantial questions of law as set out in paragraph 4(a), (b) and (c) of the appeal memo. The three substantial questions of law, as framed, are as under:

“4(a) Question is whether, on the facts and circumstances of the case and in law, the Tribunal is right in deleting the addition on the ground that in the case of East Coast Enterprises, the Tribunal had upheld the deletion without discussing the facts of the said case of East Coast Enterprises?

(b) Question is whether, on the facts and circumstances of the case and in law, the Tribunal is right in holding that the interest income cannot be assessed as income from other sources without referring to section 56 of the Income-tax Act and contrary to the decision of the apex court reported in Tuticorin Alkali Chemicals and Fertilisers Ltd. v. CIT [1997] 227 ITR 172?

(c) Question is whether, on the facts and circumstances of the case and in law, the Tribunal is right in coming to a conclusion that the interest income received by the respondent is nothing but business income and, therefore, the same cannot be assessed as income from other sources?”

2. The brief relevant facts of the case are that the respondent M/s. Lok Holdings was, at the relevant time, a firm involved in the business of development of properties.

3. In the course of its business, the assessee-firm received monies in advance from customers intending to purchase flats in the properties as developed by the assessee. These monies were of the nature of booking/advances. Since these monies received could not be immediately utilised for the business of the firm, the surplus amounts from such money received came to be temporarily invested with banks and other concerns. Such deposits with accrued interest thereon which was received by the assessee-firm was deducted from the work-in-progress till the conclusion of the project. For the assessment year 1992-93, the income from such interest was Rs. 52,28,289. The Assessing Officer assessed this interest income as income from other sources and thus made an addition in this regard under the head “Income from other sources”. On an appeal by the assessee, the Commissioner of Income-tax (Appeals), following the decision of the Tribunal dated April 29, 2002, delivered in the case of East Coast Enterprise, deleted the income. The Revenue preferred an appeal against the order passed by the Commissioner of Income-tax (Appeals) and by a judgment and order dated June 14, 2004, the Income-tax Appellate Tribunal dismissed the appeal filed by the Revenue. It is in such circumstances, that the present appeal came to be filed.

4. The short and basic issue on which the three substantial questions of law as raised, turn, is whether the interest income earned by the assessee as set out hereinabove would be assessable as “income from business” or as “income from other source”.

5. On behalf of the Revenue, counsel contended that the issue had been dealt with and settled by a judgment of the apex court in the case of Tuticorin Alkali Chemicals and Fertilisers Ltd. v. CIT [1997] 227 ITR 172. In that case, the assessee Tuticorin was a company incorporated in 1971 for the purpose of manufacturing heavy chemicals. It commenced trial production only on June 30, 1982. For an earlier period, being the accounting year ending an June 30, 1981, the assessee received interest of Rs. 2,92,440, from certain investments of certain term loans received from various banks and financial institutions. That during the year under assessment, the business of the company had not commenced. The assessee filed a return disclosing a sum of Rs. 2,92,440 as income from other sources but later, realising its mistake, filed a revised return showing a business loss of Rs. 3,21,802/. In the revised return the company claimed that the interest income of Rs. 2,92,440 should go to reduce the pre-production expenses which would ultimately, be capitalised. During the accounting year ending June 30, 1982, similar interest income of Rs. 1,08,336 was received by the company. In its return for the assessment year 1983-84 the company again claimed that the interest income should go to reduce the pre-production expenses. On the aforesaid facts the apex court held that the company had surplus funds in its hands and in order to earn income out of the surplus funds, it had invested the amount for the purpose of earning interest and the interest thus earned would be of revenue nature and would have to be taxed accordingly. It was further held that the company could not claim any reliefs under section 70 or 71 since its business had not started and there could not be any computation of business income or loss incurred by the assessee. In such a situation, the expenditure incurred by the assessee could, not be allowed, as a deduction nor could it be adjusted against any other income under any other head. Similarly, any income from a nonbusiness 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.

6. In our view, the facts of the present case are completely different than the facts in the case of Tuticorin [1997] 227 ITR 172 (SC). In that case, the business of the assessee-company had not commenced and, therefore, the apex court held that there could be no income from business.

7. Apart from this, the business of the assessee in that case was the manufacturing of heavy chemicals. The investment of loans received and the accruing of interest therefrom were not a part of the business of the assessee-company. In the present case, the fact situation is that the income admittedly arose out of a running business of the assessee-company. Interest was earned out of such monies accruing from the business of the assessing-company and the same was also utilised for the purpose of business. This is not a case where the assessee did not have a running business during the assessment year.

8. The advocate appearing for the respondent relied upon a judgment of the Division Bench of this court in the case of CIT v. Paramount Premium P. Ltd. reported in [1991] 190 ITR 259. The facts of Paramount were almost similar to the facts before us. The assessee in that case had received deposits in instalments from prospective purchasers while the work of construction was in progress. If the purchasers failed to make deposits by stipulated dates, they were required to pay interest. Idle amounts were deposited with the bank or given on temporary loans until such time as they were required for construction. Thus, interest was earned on these amounts. In due course the assessee's appeal was considered by the Tribunal and the Tribunal recorded a finding that the entire interest sprang from the business activity of the assessee and did not arise out of any independent activity. This court held that the aforesaid interest was assessable as income from business and affirmed the correctness of the view of the Tribunal that the interest so earned was “Income from business”. In our view, the law as laid down in CIT v. Paramount Premium P. Ltd. [1991] 190 ITR 259 (Bom) is squarely applicable to the facts of the present case.

9. The advocate for the assessee also brought to our notice a judgment of the apex court in the case of CIT v. Bokaro Steel Ltd. reported in [1999] 236 ITR 315. In that case, the assessee-company was in the business of manufacturing of steel. For the purpose of construction of the plant the company gave advances to its contractors and earned interest from such advances, which were adjusted against the charges payable to the contractors, thus utilising the interest amount to reduce the cost of construction. In such a fact situation, the apex court affirmed the finding of the High Court, that these were capital receipts and not income of the assessee from any independent source. The fact situation in that case was completely different than the fact situation in the present case. The assessee in the case before the Supreme Court was not in the business of construction. The interest receipts had been utilised towards creation of capital assets. The said judgment is not relevant for deciding the present matter. Lastly, the advocate for the assessee brought to our notice, a more recent judgment of the Division Bench of this court in the case of Shree Krishna Polyster Ltd. v. Deputy Commissioner Of Income-Tax reported in [2005] 274 ITR 21 (Bom). In that case, the assessee-company was engaged in the business of manufacturing of synthetic yarn. The assessee received surplus money in public issue of shares and the said money was invested in bank deposits for a period of 45 days. In their returns the assessee claimed that this interest was “business income”,. The Tribunal found that the assessee was not in the business of money-lending and, therefore, the interest income could not be said to be business income. It treated the income as “Income from other sources”. The fact situation in that case was also different from the fact situation in the present case. In that case, the assessee-company was not in the business of money-lending. In the present case, admittedly, the assessee-company was engaged in a construction business and had deposited money received in the course of such business with the bank, earning interest thereon.

10. For the reasons aforesaid, in our opinion, there is no merit in this appeal as the questions of law as raised would not arise. Hence, the appeal dismissed.