Commissioner of Income Tax Vs A.S. Nizar Ahmed and Co.

R. Jayasimha Babu, J.

The question referred to us for our consideration, at the instance of the revenue, is as follows :

"Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in holding that the interest income should not be excluded for the purpose of calculating the deduction u/s 80HHC of the Income Tax Act, 1961 ?"

The assessment years are 1989-90 and 1990-91.

2. The assessee is a firm doing business in export of tanned and finished leather. It had obtained credit facilities from the overseas branch of the State Bank of India, Madras. The assessee had, in the same bank, made deposits to the tune of Rs. 139.14 lakhs, on which it received interest at the rate of 10 per cent. The assessee''s claim that the interest received by it on those deposits should be treated as part of the income from business was negatived by the assessing officer as also by the Commissioner, but was upheld by the Tribunal. The assessee did not produce the letters from the bank sanctioning the various credit limits and facilities to support its claim that such facilities and credits would not have been provided if the deposits had not been made with the bank and that the making of the deposit was a pre-condition for the assessee enjoying those credits and other facilities from the bank. The assessee only produced a letter, dated 2-11-1989, although those facilities and the deposits had been made several years prior to 1989. In that letter it was stated that the investment in fixed deposit was made at the instance of the bank. The Commissioner did not attach any value to that letter and held that on the assessee''s own showing it was to the advantage of the assessee to keep money in deposit as it received interest at higher rate on the deposit, while the interest it paid to the bank on the credit facilities extended to it was less. It was also found by the Commissioner that when the bank later raised the interest rate on some of the facilities to 18 per cent, the assessee withdrew a sum of Rs. 60 lakhs from those deposits, without any detriment to the facilities that had been extended to it by the bank.

3. When the matter was taken to the Tribunal, it took the view that the letter from the bank was sufficient basis to hold that the making of the deposit and the facilities enjoyed from the bank were inextricably linked. It also held that the interest received on those deposits was required to be treated as part of the income from the business for computing the relief u/s 80HHC.

4. That view of the Tribunal cannot be sustained. The Commissioner has rightly pointed out that the deposits kept by the assessee in the bank in a large sum of over Rs. 130 lakhs were to the assessee''s own advantage, inasmuch as they provided a return at the rate of 10 per cent. That was in the nature of an additional source of income to the assessee which was not in any way linked to the business that it was carrying on. The credit facilities enjoyed by the assessee from the bank had been extended to it by charging interest at a rate lower than the one which the assessee was receiving on its deposits. The assessee, therefore, had found it advantageous to borrow money from the bank and have those borrowed funds used in the business. The interest income that the assessee received on its own funds kept in deposit with the bank, therefore, did not have any direct link with the business that was being carried on with the funds made available to the assessee by the bank by way of loans on which the assessee was required to pay less interest.

5. The interest paid by the assessee to the bank was, no doubt, an item of expenditure in the computation of its business income. That, however, would not justify taking the income that the assessee received by way of interest on the deposits that it had with the bank, as part of its business income when in reality it was not. The deposit made with the bank was for the convenience and benefit of the assessee with a view to derive higher interest income. It was not a deposit made pursuant to any requirement imposed by the bank at the time of sanctioning of the facilities. The bank''s decision to extend the facilities was linked more to the business prospects of the assessee and the confidence the bank had in the integrity and entrepreneurial capacity of the partners of the firm who ran the business.

6. In cases where security deposit is required to be given before enjoying a facility as in the case of supply of electricity, or, in a case where the deposit is a pre-condition for enjoying a facility essential for running the business, the making of the deposit would be regarded as being inextricably linked to the running of the business of the assessee, so as to enable the assessee to regard the interest derived on the deposit as being part of its business income.

7. Learned counsel for the assessee submitted, placing reliance on certain observations made in the case of Brooke Bond and Co. Ltd. (Now known as Brooke Bond Leibig Ltd.) Vs. Commissioner of Income Tax , West Bengal-II, Calcutta, , that even if a part of the business income is computed under a different head for the purpose of assessment, it would nevertheless retain the character of income from business and should be treated as such. Learned counsel relied on the observations of the court in that case that the mere circumstance that the assessee showed the dividend income under the head "income from other sources" was not decisive of its true character and that it must be determined from the evidence whether having regard to the true nature and character of the income it should be described as income from business even though it is liable to fall for computation under another head.

8. The facts of this case would go to show that though the assessee wanted the interest income to be treated as business income, the assessing officer as also the Commissioner had found, in our opinion rightly, that the claim could not be sustained. The true character of the income not being business income, the fact that the assessee had claimed it to be business income will not make it so.

9. Learned counsel also relied on the decision of the Apex Court in the case of Vellore Electric Corporation Ltd. Vs. Commissioner of Income Tax, Madras, . The court therein upheld the claim of the assessee which was an electricity company that interest from investment of amounts in the contingencies reserve in securities specified by the Electricity (Supply) Act was attributable to the priority industry and had to be taken into account in computing special deduction u/s 80-I of the Income Tax Act. It was noticed in that case that there was a direct and proximate connection between the carrying on of the business of generation and distribution of electricity by the electricity company and the income derived by way of interest from the investments in securities of the sums appropriated to the contingencies reserve as required under the provisions of the Sixth Schedule to the Electricity (Supply) Act, which was one of the conditions of the licence on the basis of which the electricity company could carry on its business. That decision is not of any assistance to the assessee here as the making of the deposit with the bank was not a statutory requirement or condition subject to which the assessee was enabled to carry on business nor was it even a condition precedent for enabling the assessee to obtain the credit facilities from the bank.

10. The question referred to us is, therefore, answered against the assessee and in favour of the revenue.