Judgment:
1. These are two appeals filed by the Department against the orders of the CIT(A) relevant to asst. yrs. 1989-90 and 1990-91. The only ground in these appeals are against in treating the income of interest earned on surplus funds as business income and directing the AO to allow deduction under s. 32AB of the IT Act. As we have already stated that similar ground is taken in both of these appeals, therefore, these appeals will be disposed of by a single order for the sake of convenience.
2. During the course of assessment proceedings for asst. yr. 1989-90, the AO noted that assessee earned interest income by way of investing the amount in FDRs, in securities, etc. and shown this income as income from business and accordingly availed the deduction under s. 32AB of the IT Act. Objection of the assessee, was sought by the AO and after considering the reply of the assessee, the AO was not satisfied.
Accordingly he treated the income earned as interest on these accounts as income from other sources and negatived the claim of deduction under s. 32AB. Similar decision was taken by the AO relevant to asst. yr.
1990-91. The assessee preferred appeal before the CIT(A) who examined the issue in detail and then allowed the appeal of the assessee by holding that the interest income earned by assessee is part of business income. Accordingly, he directed the AO to treat this income as business income and also allow the deduction under s. 32AB as claimed by the assessee. Similar decision was taken for asst. yr. 1990-91. Now the Department is in appeal here before us for both the years.
3. The learned Departmental Representative strongly placed reliance on the orders of the AO. He further placed reliance on CIT vs. Rajasthan Land Dev. Corpn. (1995) 211 ITR 597 (Raj) and South India Shipping Corpn. vs. CIT 4. On the other hand, the learned counsel of the assessee strongly placed reliance on the orders of CIT(A) and further stated that in a recent decision by the Madras High Court in CIT vs. Madras Refineries Ltd. (1997) 228 ITR 354 (Mad) the decision cited by the Department has been discussed in detail and then decided the issue in favour of assessee. It was also stated that almost all the important decisions on this subject has been discussed by the Hon'ble Madras High Court and then it came to conclusion that interest earned on surplus funds of the business is income from business. It was further stated that the FDRs and other securities were obtained for the business compulsions as the assessee had to obtain the contract from railways and to the satisfaction of railway the securities has to be given and earning on these securities, therefore, should be treated income from business. In regard to reliance made by the learned Departmental Representative on (1999) 240 ITR 24 (Mad) (supra), it was stated that the facts of this case are entirely different and, therefore, this case law is not applicable on the facts of the present case.
5. We have heard the rival submissions and considered them carefully.
We have also perused the case laws as relied upon by both the parties.
After considering the material on record and considering the ratios of various case laws as relied upon by both the parties and also by the CIT(A), we find that there is no infirmity in the orders of the CIT(A).
The CIT(A) has discussed the issue in detail and then came to a conclusion that the income shown by the assessee is income from business and not from other sources. The contention of the learned authorised representative before CIT(A) that the capital money in the business in stock-in-trade of the business and such stock-in-trade rotates in one form or the other, therefore, rotation of capital in different form is in the course of carrying on of the business. The contention of the authorised representative that as and when the money is spared from utilisation, the same is not kept idle but put in the bank in the form of FDRs and such income arising as a result of utilisation of capital money being stock-in-trade, would be income under the head "business income". Further contention of the learned authorised representative that when the surplus money was lying idle and the same capital was invested in FDRs or obtaining securities for the purposes of tendering sureties to the railways to obtain the contracts were meant for business purposes. It was further argued that keeping money in safe custody in the shape of FDRs and securities was for a business and that was as the assessee was intended to start a new unit and accordingly the money was invested by way of FDRs, etc. and at the end of the financial year 1989-90 the deposits remained only to the tune of Rs. 50 lacs against more than Rs. 2 crores because the assessee had succeeded in obtaining the licence for a new unit for manufacturing of spun yarn from cotton in existing factory premises where other manufacturing activities were carried on. The Textile Commissioner, Ministry of Textiles, Government of India, Bombay, granted approval for setting up a new unit of manufacturing spun yarn at Sahibabad for existing factory premises and the money kept in short-term with the bank was substantially withdrawn and utilised for the purposes of extension of business. Therefore, the income earned on these investments is to be treated as income from business and not from the other sources of income. These contentions of the learned authorised representative were considered by the CIT(A) with a deep thought and after application of mind then the CIT(A) came to the conclusion that these incomes are part of the business income. While doing so the CIT(A) has considered numerous decisions of the apex Court as well as of the various High Courts of the country. In the case of Narain Swadeshi Wvg. Mills vs. CIT (1954) 26 ITR 765 (SC), where their Lordships of the Supreme Court of India has observed as under : "The word 'business' connotes some real, substantial and systematic or organised course of activity or conduct with a set purpose. On the other hand, a single and isolated transaction has been held to be conceivably capable of falling within the definition of business as being an adventure in the nature of trade provided the transaction bears clear indices of trade. The question, therefore, whether a particular source of income is business or not must be decided according to our ordinary notion as to what a business is." 6. In case of Snam Progretti, SPA vs. Addl. CIT (1981) 132 ITR 70 (Del), the Hon'ble Delhi High Court after placing reliance on the various decisions of Supreme Court in CIT vs. Cocanada Radhasvami Bank Ltd. (1965) 57 ITR 306 (SC), CIT vs. Chugan Das & Co. (1965) 55 ITR 17 (SC), United Commercial Bank Ltd. vs. CIT (1957) 32 ITR 688 (SC) observed as under : "If a person runs a bank or other business and utilises his funds for the purpose of that business, it is also open to the same person to use some of the funds for business and to keep a part of the funds in a form where it yields income. The question to be seen in such a case is whether the interest income is derived also from what may be described as "business activity". If it is so derived then the mere fact that it is taxed under a different section will make no difference. The approach to the problem has, therefore, to be disassociated from the section under which the tax is imposed on the form of income." 7. The CIT(A) also considered the ratio of cases in CIT vs. Motilal Hira Bhai Spg. & Wvg. Co. Ltd. (1978) 113 ITR 175 (Guj), Andhra Pradesh State Financial Corpn. Ltd. vs. CIT (1984) 150 ITR 533 (AP), CIT vs.
Paramount Premises (P) Ltd. (1991) 190 ITR 259 (Bom), CIT vs. Tirupati Woollen Mills Ltd. (1992) 193 ITR 252 (Cal), (1970) 77 ITR 139 (sic), CIT vs. Bhavnagar Trust Corpn. (P) Ltd. (1968) 69 ITR 278 (Guj) and after considering the ratio of the decisions reported in these ITRs, then CIT(A) drew an inference that income earned as interest was business income derived in the course of carrying on of the business and, therefore, the appellant is entitled to deduction under s. 32AB of the IT Act. We have also considered other decisions relied upon by learned Departmental Representative and we find that those ratios are helping to the case of the assessee. In case of CIT vs. Rajasthan Land Development Corporation (supra) the Hon'ble Rajasthan High Court has laid down some principles which are applicable in assessing interest income under the provisions of IT Act. These provisions were also discussed by the Hon'ble Madras High Court in the case of CIT vs.
Madras Refineries (supra) and lastly, it was held that if the deposit made by the assessee in the bank was capital employed, that would become part of the capital of the new industrial undertaking. Any income earned by the capital employed would automatically become the business income of the assessee and it could not be treated as income earned from "other sources". Therefore, the Tribunal was right in holding that the interest income on bank deposits had to be assessed under the head "business income".
8. While coming to the conclusion, the Hon'ble Madras High Court observed in his order the ratio of the decision relied upon by the learned Departmental Representative (1995) 211 ITR 597 (Raj) (supra).
The observations of the Madras High Court are given in bottom para of p. 359 continuing on p. 360 which is reproduced here as under :In CIT vs. Rajasthan Land Development Corporation (1995) 125 CTE (Raj) 261 : (1995) 211 ITR 597 (Raj), The Rajasthan High Court while considering the provisions of ss. 28 and 56 of the IT Act, 1961, held (i) interest on fixed deposits and other deposits before the commencement of business is an income from other sources; (ii) income from interest on deposits of surplus money during the construction period is also to be considered as income from other sources; (iii) interest income in respect of surplus money, not required for business and deposited in banks, or with persons as idle money, for safe keeping, would be assessable as income from other sources; if the income from interest is form a fund which has been brought as surplus capital, it would be assessable as income from other sources; (iv) in respect of investment of surplus fund, "there is divergence" of opinion between different High Courts and the Rajasthan High Court has held that if the surplus funds are invested, instead of keeping them idle, the income by way of interest should be treated as income from other sources; (v) if the surplus fund emerge out of business regularly carried on by the assessee and with the intention to carry on the business of money-lending the loan is advanced, the income therefrom would be income from business. The intention has to be gathered with reference to all the activities of advancing money, which should be permitted by the objects of the company and also by the resolution of the board of directors to carry on the business of money-lending." 9. We noted that the Hon'ble Rajasthan High Court laid down some principles to treat the interest income in various capacities i.e., income from other sources or from business. In principle No. 5 the Hon'ble Rajasthan High Court has observed that if the surplus funds emerge out of business regularly carried on by the assessee and that the intention to carry on the business of money-lending the loan is advanced the income therefrom, would be income from business. The Hon'ble Rajasthan High Court has further observed that the intention has to be gathered with reference to all the activities of advancing money which should be permitted by the objects of the company and also by the resolution of the board of directors who carries on the business of money-lending.
10. Here in the present case, we found that the assessee's intention was a bona fide intention and the surplus money which was earned from the business income and was lying idle where no income was earned out of the idle income then assessee made a fixed deposit with the bank and when the assessee succeeded in obtaining the licence from the Government of India for new unit for the manufacturing of spun yarn from cotton in the existing factory premises, then, he encashed the FDRs and utilised for the purpose of expanding the business. From the activities of the assessee it could be inferred easily that money lying idle was deposited in the FDRs was for the purpose of doing the business and not earning the interest income only. Therefore, in view of these facts and circumstances we confirm the finding of CIT(A) on the reasoning given by CIT(A) and the reasoning given her by us.