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Poompuhar Shipping Corpn. Ltd. v. Income Tax Officer

Income Tax Appellate Tribunal

Oct 26, 1990

Judgment

Subsequent
References

CaseIQ

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Tribunal Opinion — Summary

Factual and Procedural Background

This appeal by the assessee challenges the order of the Commissioner of Income Tax (CIT) dated 24 March 1987 passed under section 263 of the Income-tax Act, 1961 in respect of the assessment year 1982-83 (previous year ended 31 March 1982). The Commissioner, on scrutiny, considered the assessment order passed by the ITO on 10 July 1984 (under sections 143(3) read with 144B) to be erroneous and prejudicial to the interests of Revenue because interest received from banks on deposits and on loans had been treated by the ITO as “business income” rather than “income from other sources.”

A notice under section 263 was issued on 5 March 1987 proposing to modify the assessment by excluding the interest amount from “business income” and assessing it under “other sources.” The assessee responded in writing on 21 March 1987 explaining that Government of Tamil Nadu funds (Rs. 2 crores as share capital and Rs. 1.60 crores as Ways and Means loan) were provided to acquire a new ship but the acquisition was delayed; consequently, portions of the funds (Rs. 50 lakhs placed in inter-company deposits and Rs. 60 lakhs in a deposit with State Bank of India) were invested short-term rather than kept in current account. The assessee also pointed out overdraft facilities were availed against some deposits, that its Memorandum of Association authorized borrowing and lending, and that interest receipts and payments were integral to its business operations.

The Commissioner rejected the assessee's submissions, directed the ITO to reclassify the interest as income from other sources, and the assessee subsequently appealed to the Tribunal. At the hearing the assessee filed accounts, its memorandum and articles, the s.263 notice and reply, and other annexures; both parties advanced their arguments before the Tribunal.

Legal Issues Presented

Whether the interest income earned by the assessee on short-term deposits and inter-company loans (money arising from Government-sanctioned funds intended for ship acquisition) should be treated as "business income" or as "income from other sources."
Whether the CIT was justified in invoking and exercising powers under section 263 of the Income-tax Act, 1961 to modify the assessment on the ground that the assessment order was erroneous and prejudicial to the interests of Revenue.

Arguments of the Parties

Appellant's (Assessee's) Arguments

The funds in question originated from Government grants and loans intended for acquisition of ships; acquisition was delayed and the funds were placed in short-term fixed deposits rather than kept idle in current accounts.
The assessee invested Rs. 50 lakhs in inter-company deposits and Rs. 60 lakhs with State Bank of India; the deposits were renewed from time to time and overdraft facilities were availed against deposits for working capital needs.
The Memorandum of Association (sub-clauses (vii) and (viii) of clause 21) expressly empowered the company to borrow, lend and invest money; therefore earning and payment of interest fall within the scope of its business activities.
Interest receipts and payments were treated as business income/expenditure in earlier years (up to AY 1981-82) and in the assessment made on 10 July 1984 the interest was assessed as business income.
Reliance was placed on judicial decisions including CIT v. Motilal Hirabhai Spg. & Wvg. Co. Ltd. and CIT v. A.P. Industrial Infrastructure Corpn. Ltd. (as supportive authority for classifying interest as business income on facts).

Departmental Representative's Arguments

The additional capital sanctioned by the Government was for the purpose of acquiring new ships; since the ships were not acquired in the year, the funds were merely surplus money temporarily invested in short-term deposits.
Because the money was surplus and not integral to the assessee's core business operations at that time, the interest earned should be assessed under the head “income from other sources.”
Relied on judicial authorities including Collis Lines P. Ltd. v. ITO and CIT v. Seshasayee Paper & Boards Ltd. to support the contention that money temporarily lying idle and placed in bank deposits does not constitute money-lending as part of business.
Contended that A.P. Industrial Infrastructure Corpn. Ltd. (relied on by the assessee) is distinguishable because in that case disbursement of funds was the assessee's actual business.

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court
CIT v. Motilal Hirabhai Spg. & Wvg. Co. Ltd., 1977 CTR (Guj) 674 : (1978) 113 ITR 173 (Guj)	Relied on by the assessee (the opinion records reliance but does not specify in the extract the precise legal proposition taken from this case).	The opinion records that the assessee relied on this decision; the Tribunal's reasons do not separately analyze or apply this case in detail in the provided text.
CIT v. A.P. Industrial Infrastructure Corpn. Ltd., (1989) 175 ITR 361 (AP)	Relied on by the assessee (the extract does not state the specific principle; the Departmental Representative, however, described this case as one where disbursement of funds was the assessee's business).	The Tribunal noted the parties' positions (assessee relied on the case; the Revenue said it was distinguishable). The Tribunal's analysis found the facts of the present case to show lending as part of business and therefore treated factual comparisons as making competing authorities distinguishable.
Collis Lines P. Ltd. v. ITO, (1982) 29 CTR (Ker) 135 : (1982) 135 ITR 390 (Ker)	Cited by the Departmental Representative to support the proposition that money lying idle and kept in bank custody was not deposited as part of money-lending business.	The Tribunal treated this decision as distinguishable on facts, noting that in Collis Lines the Court found the money was kept in safe custody and not used as a money-lending business, whereas in the present case the Tribunal found lending and deposits were part of the assessee's business activity.
CIT v. Seshasayee Paper & Boards Ltd., (1985) 156 ITR 542 (Mad)	Cited by the Departmental Representative (the extract records that in Seshasayee the assessee had not established its factory — a factual context relied upon by Revenue).	The Tribunal regarded Seshasayee as distinguishable on its facts, observing that unlike Seshasayee the present assessee had been engaged in shipping and money-lending activities since its inception and had established a course of business involving lending.
State of Gujarat v. Raipur Manufacturing Co. Ltd., 19 STC 1	Supreme Court authority for the proper meaning of the word “business” in taxing statutes: an occupation or profession occupying time, attention and labour, ordinarily entered into with a profit motive; business requires a course of dealings with volume, frequency, continuity and regularity.	The Tribunal expressly invoked this definition to frame its inquiry into whether the assessee's lending and deposit activities constituted business: it examined volume, continuity, historical treatment and the Memorandum of Association to conclude that lending/money-dealing formed part of the assessee's business.

Court's Reasoning and Analysis

The Tribunal's analysis proceeded by reference to the statutory definition of “business” as explained by the Supreme Court in State of Gujarat v. Raipur Manufacturing Co. Ltd., and by applying that framework to the undisputed facts and documentary material before it. The Tribunal considered the following specific points (as recorded in the opinion):

Corporate Objects and Powers: The Memorandum of Association (clause 21, sub-clauses (vii) and (viii)) explicitly authorised borrowing, lending and investing money, which supports a factual finding that money-lending/investment could be part of the company's business operations.
Historical Pattern and Accounts: From the first assessment year (ending 31 March 1975) through to the accounting year ending 31 March 1982, the company had both shipping income and interest receipts. The Tribunal reproduced figures showing interest receipts across several years, indicating a recurring pattern rather than an isolated or one-off receipt.
Loans and Advances: The balance-sheet items for loans and advances across years were examined; the auditors' reports for 1980-81 and 1981-82 stated that loan recipients were repaying principal and interest as stipulated, indicating systematic money-lending activity.
Use and Purpose of Deposits: The Tribunal noted that Rs. 50 lakhs (FDRs) were deposited with SBI specifically to avail overdraft facilities; this demonstrated that the deposits were business funds used in the ordinary course of commercial operations rather than idle surplus money.
Availability and Prudence: The funds were placed in short-term deposits so that they remained readily available for business purposes at short notice. The Tribunal reasoned that choosing short-term deposit placements instead of keeping funds in current account without interest was a normal and prudent business practice aimed at maximizing earnings from available funds.
Prior Treatment by Authorities: The Tribunal observed that up to AY 1981-82 the interest income had been treated by the income-tax authorities as business income, which informed the factual matrix and historical consistency of treatment.
Assessment of Cited Authorities and Commissioner’s Reasons: The Tribunal examined the authorities relied upon by the Department and found them distinguishable on facts (specifically Collis Lines and Seshasayee). It also observed that the Commissioner’s order under section 263 lacked detailed reasons — the Commissioner had only stated that he had considered the facts and could not accept the assessee's contention, without explaining the basis for reclassifying the income.

On the basis of the above considerations the Tribunal concluded that the deposits and inter-company placements were part of the assessee's business funds and activities, that the interest earned was generated by normal business operations (including lending and the strategic placement of funds to secure overdrafts), and therefore the interest income did not properly belong to the head “income from other sources.” Applying the State of Gujarat formulation of “business” (volume, continuity, profit motive and course of dealings), the Tribunal found sufficient indicators of a business activity of lending/investing and concluded that the Commissioner’s exercise of s.263 to reclassify the income was not justified on the facts presented.

Holding and Implications

Holding: The appeal is allowed. The Tribunal cancelled the order passed by the Commissioner under section 263 of the Income-tax Act, 1961 and restored the assessment order dated 10 July 1984 passed by the ITO, by which the interest income was assessed as business income.

Implications:

Direct Effect on the Parties: The Tribunal's decision leaves the interest receipts for the accounting year ending 31 March 1982 (assessment year 1982-83) classified and assessed as business income in accordance with the ITO's original assessment dated 10 July 1984. The CIT's direction to reclassify that income under “other sources” was set aside.
Broader Precedential Impact: The opinion does not assert or discuss any novel legal rule beyond applying settled principles (as articulated in State of Gujarat v. Raipur Manufacturing Co. Ltd.) to the facts. The Tribunal emphasized fact-specific distinctions from authorities invoked by the Revenue; it did not purport to lay down a new general principle of law. Therefore, the direct consequence is the restoration of the assessee's assessment on the facts of this case rather than the creation of a new binding precedent.

Note: This summary is prepared exclusively from the text of the provided opinion. No information has been added beyond what the opinion itself records.

Show all summary ...

A. Satyanarayana, A.M:— This appeal filed by the assessee is against the order of the CIT dt. 24th March 1987 under s. 263 of the IT Act, 1961 for the asst. yr. 1982-83, for which the previous year ended on 31st March 1982.

2. On a scrutiny of the records of the assessee for the asst. yr. 1982-83, the Commissioner noticed that the interest received from banks on deposits and on loans had been considered as “business income” instead of “income from other sources”, as the deposits in the banks were not part of the assessee's business activity. He felt. that the assessment order under s. 143(3) read with s. 144B passed by the ITO on 10th July., 1984 for the asst. yr. 1982-83 was erroneous and prejudicial to the interest of Revenue. Proceedings under s. 263 of the IT Act, 1961 were intiated by notice dt. 5th March 1987. The Commissioner proposed to modify the assessment by excluding the amount from “business income” and considering the same under the head “other sources.” The assessee appeared before the Commissioner and filed written submissions dt. 21st March, 1987. It was submitted therein that the Government of Tamil Nadu granted Rs. 2 crores towards share capital and Rs. 1.60 crores towards Ways and Means loan to the assessee. The said sums were given to acquire a new ship. The assessee company was negotiating to buy a ship which could not later materialise. In the meantime the assessee company instead of keeping the money in current account invested Rs. 50 lakhs in inter-company deposits and Rs. 60 lakhs in a deposit with the State Bank of India. Against the deposit, the assessee company availed overdraft facilities for working capital requirements. The assessee also paid interest on the above Ways and Means loan to the Government of Tamil Nadu and also to the State Bank of India for the overdraft facilities. It was also pointed out that the assessee was empowered to borrow money or to receive money and also lend money in the course of carrying on business as evidenced by sub-cls. (vii) and (viii) of cl. 21 of its Memorandum of Association. It was urged that the earnings and payments of interest on deposits and loans was part of its business activity and as such interest earned out of the deposits is part of the profits and gains of the business, It was further urged that the earning of interest on deposits was integral part of the assessee's business activity and so interest should not be taxed under “income from other sources.”

3. The Commissioner did not accept the submissions of the assessee and held as under:

“I have considered the facts and circumstances of the case carefully. On the facts of the case, I am not in a position to accept the contention of the assessee that the interest income is to be treated as ‘Business Income’.

In that view he directed the ITO to exclude, the amount of interest income from business income and consider the same under the head ‘other sources’. Aggrieved by the order of the Commissioner under s. 263, the assessee has preferred the present appeal before the Tribunal.

4. At the time of hearing, the assessee's counsel filed a paper book of Annexures A to I, copy of the notice under s. 263 dt. 5th March 1987, copy of the assessee's reply dt. 21st March 1987 printed accounts of the assessee company for the financial years ending on 31st March 1975, 31st March, 1979, 31st March 1981 and 31st March 1982 and copy of the Memorandum and Articles of Association of the assessee company. The arguments of the assessee's counsel were to the following effect: The assessee company, a Government of Tamil Nadu undertaking was incorporated under the Companies Act, 1956 on 11th April, 1974. The main objects of the company was to purchase, charter or hire steam and other ships or vessels and to carry on the business of shipping. This is evident from the mam objects cl. III in the Memorandum of Association. The Tamil Nadu Government in their G.O dt. 7th Dec. 1978 permitted the assessee to purchase two ships for carrying coal from Haldia to Tuiticorin for Tamil Nadu Electricity Board. For this purpose it was decided to raise further capital of Rs. 300 lakhs. By G.O dt. 23rd March 1981 the Government of Tamil Nadu sanctioned the investment of a sum of Rs. 2 crores as additional share capital. Accordingly in the accounting year ending on 31st March 1982 the share capital was increased from Rs. 430 lakhs to Rs. 630 lakhs. This is evident from the Schedule ‘A’ to the balance sheet of the company as on 31st March 1982. There was some delay in acquiring the bulk carriers due to continuous negotiations between the assessee company and foreign companies. In the meantime the Board of Directors of the assessee company decided to place the funds in short-term fixed deposits with the State Bank of India and other corporations and these deposits were renewed from time to time. During the accounting year ended on 31st March 1982 relevant for the asst. yr. 1982-83 the assessee company earned an interest income of Rs. 49,73,865. This was shown as business income and was assessed as such in the assessment made on 10th July, 1984. The direction of the Commissioner to the Assessing Officer to exclude the amount of interest income from business income and assess the same under the head ‘other sources’ is not warranted on the facts and circumstances of the case. Upto asst. yr. 1981-82 the interest income was traeted as business income. The earning of interest and payment of interest are parts of the assessee's business activity. Interest earned out of the funds invested by the assessee company is part of its business routine. The assessee company deposited the monies with the banks and other corporations and earned interest. Such activity is an integral part of the assessee's business. Sub-cls. (vii) and (viii) of cl. 21 of the Memorandum of Association gave the assessee company power to borrow money, to lend money and to invest money of the assessee in such manner as the directors think fit. The assessee company had availed overdraft facilities against such deposits and had paid interest. Such interest payment was debited to the profit and loss account and was allowed as business expenditure. As the interest earned and paid are parts of the assessee's business activity, the interest income should not be directed to be assessed under the head ‘other sources’. Reliance is placed on the decisions of CIT v. Motilal Hirabhai Spg. & Wvg. Co. Ltd., 1977 CTR (Guj) 674 : (1978) 113 ITR 173 (Guj) and CIT v. A.P Industrial Infrastructure Corpn Ltd., (1989) 175 ITR 361 (AP)

5. The arguments of the Departmental Representative were to the following effect; The main purpose behind the Government's sanction of an additional capital of Rs. 200 lakhs is to enable the assessee company to acquire new ships. The assessee could not acquire them in this year. The money was kept in short-term deposits. It was surplus money. It was required for business. Hence, the interest income arising out of the deposits is assessable as income from other sources. For this reliance is placed on the decisions in Collis Lines P. Ltd. v. ITO, (1982) 29 CTR (Ker) 135 : (1982) 135 ITR 390 (Ker) and CIT v. Seshasayee Paper & Boards Ltd., (1985) 156 ITR 542 (Mad). The case of A.P Industrial Infrastructure Corpn. Ltd. (supra) relied on by the assessee's counsel is distinguishable on facts. In that case disbursement of funds was the assessee's business.

6. We have considered the rival submissions, papers filed before us and the case law cited. The assessee company was incorporated under the Companies Act, 1956 on 11th April, 1974. The main object of the assessee comapny is to purchase, charter, hire steamships and to maintain and operate transport services by water. The incidental or ancillary objects included borrowing money and lending money as can be seen from sub-cls (vii) and (viii) of cl. 21 of the Memorandum of Association. As laid down by the Supreme Court in the case of State of Gujarat v. Raipur Manufacturing Co. Ltd., 19 STC 1, in taxing statutes, the word “business” is used in the sense of an occupation, or profession which occipies the time, attention and labour of a person, normally with the object of making profit. To regard an activity as business there must be course of dealings, either actually continued or contemplated to be continued with a profit motive, and not for sport or pleasure. Whether or not a person carries on business in a particular commodity must depend upon the volume, frequency, continuity and regularity of transactions of purchase and sale in a class of goods and the transaction must ordinarily be entered into with a profit motive. Asst. yr. 1975-76 is the first assessment year of the assessee. Right from the ending 31st March 1975 to 31st March 1982 the assessee had income from shipping as well as interest receipts. From the printed accounts filed before us the particulars of shipping and other income are as under:

Year ending Shipping income Interest on deposits with banks and on loans included in ‘other income’ Rs. Rs. 31st March, 1975 34,61,451 4,78,735 31st March, 1978 1,37,09,935 62,706 31st March, 1979 1,82,24,591 88,930 31st March, 1980 1,20,18,780 12,05,252 1,72,65,957 31st March, 1981 47,74,490 31,02,521 7,75,56,483 31st March, 1982 9,75,97,991 49,73,865

The loans and advances were as under:

Year ending Amount Rs. 31st March, 1975 13,61,327 31st March, 1978 15,91,141

31st March, 1979 13,33,844 31st March, 1980 1,15,15,239 31st March, 1981 1,79,51,802 31st

March, 1982 2,21,475

In the Auditors Reports for the years ending 31st March, 1981 and 31st March, 1982 the following appeared:

“The parties to whom the loans have been given by the company are repaying the prindiple amount and interest as stipulated.”

From the above, it is clear that the assessee's business activity included not only shipping but also lending money for interest. Lending money on interest was a part of its business activity. Upto the asst. yr. 1981-82 interest income has been trated by the income-tax authorities as the assessee's business income.

The cases realied on by the Departmental Representative are distinguishable on facts. In the case of Seshasayee Paper & Boards Ltd. (supra) the assessee had not established its factory. But in the present assessee's case the assessee is very much in the business of shipping and money-lending right from its inception in 1974. In the case of Collies Line P. Ltd. (supra) at page 393, the Court found that money lying idle was kept in the bank safe custody and that money was not deposited by the assessee by way of money-lending as a business.

Further, the assessee had made the deposits in the bank for availing overdraft facilities in the course of its business. This is evident from the note given in Schedule ‘H’ in the printed accounts for the year ended 31st March 1982, which reads as under:

“Two FDRs amounting to Rs. 50 lakhs have been deposited with SBI for availing overdraft facility.”

Besides, the Commissioner has not given any reasons for coming to the conclusion that the interest income cannot be treated as assessee's business income. He simply observed in his order that he had considered the facts and circumstances of the case carefully and that on the facts of the case he was not in a position to accept the contention of the assessee that the interest income is to be treated as “business income.”

7. From the facts set out above, it would be seen that the funds in question namley Rs. 50 lakhs in inter-company deposits and Rs. 60 lakhs in deposit with the State Bank of India are part and parcel of the business funds of the company. It is further noticed that these funds have been utilised only for business purposes of the assessee, as the assessee company has taken overdraft facilities on the security of the term deposit with the State Bank of India. The materials placed by the assessee establish that these funds were kept in short-term deposits, so that they are readily and easily available to the assessee company for its business transactions at short notice. The placing of these monies in such short-term deposits instead of keeping them in current account without earning any interest, would not make the interest earned on such short-term deposits “income under other sources”. All these transactions are normal business activities carried on by any prudent businessman in the ordinary course of his business in order to maximise his earnings by a wise deployment of the funds at his desposal. We are, therefore, unable to agree with the Commissioner that the “interest income” earned by the assessee should be assessed under the head “other sources” and not under the head “business income”. Accordingly we cancel the order of the Commissioner passed under s. 263 of the of the IT Act, 1961 and restore the assessment order dt. 10th July, 1984 passed by the ITO.

8. In the result, the appeal is allowed.