Madras H.C : Whether, on the facts and in the circumstances of the case, the Tribunal was correct in law in holding that the assessee is entitled to weighted deduction under s. 35B on foreign travel, advertisement, foreign branch expenses, etc. though the assessee was only purchasing goods from China and selling the same in USA and no export of Indian goods was carried on ?

High Court Of Madras

CIT vs. Gimpex (P) Ltd.

Sections 35B, 56

V.S. Sirpurkar & K. Raviraja Pandian, JJ.

Tax Case No. 897 of 1995

4th February, 2002

Counsel Appeared

Mrs. Chitra Venkatraman, for the Applicant : None, for the Respondent

ORDER

V.S. Sirpurkar, J. :

Two questions are referred to us. They are :

Whether, on the facts and in the circumstances of the case, the Tribunal was correct in law in holding that the assessee is entitled to weighted deduction under s. 35B on foreign travel, advertisement, foreign branch expenses, etc. though the assessee was only purchasing goods from China and selling the same in USA and no export of Indian goods was carried on ?

Whether, on the facts and in the circumstances of the case, the Tribunal was correct in holding that the interest received by the assessee from the fixed deposit of surplus funds should be assessed under the head ‘business’ ?

2. We shall take the first question first. The Tribunal has held in favour of the assessee on the basis of its earlier orders for the asst. yrs. 1981-82 and 1982-83. The case of the Department is, however, that the assessee is not exporting any goods and admittedly the goods are being purchased in China and sold in U.S.A. and, therefore, if the goods are not being exported ex-India, the benefits under s. 35B would not be available. The question is no more res integra. The Supreme Court in the decision reported as CIT vs. Bombay Burmah Trading Corporation (2000) 159 CTR (SC) 110 : (2000) 242 ITR 298 (SC) has observed, “The Tribunal’s reading of section that the export should be ex-India is not supported by the language of the provision or any authority. The High Court has, therefore, rightly concluded that to avail of the benefit of weighted deduction the provision does not require that the export should be ex-India. . .”

The question before the apex Court was as to whether the High Court was right in holding in favour of the assessee and giving the benefit of s. 35B though the company which was an Indian resident company was carrying on the business of exporting tea. It had incurred certain expenditures on export of tea from East Africa to U.K. This claim was disallowed by the ITO stating that s. 35B would apply only if the exports were made from India. The High Court answered this question in the affirmative that is in favour of the assessee and against the Revenue and as has been pointed out earlier, the apex Court has also confirmed the finding and the reasoning of the Bombay High Court in that case. Thus, the only ground on which the Department questions the order of the Tribunal is that the exports are not ex-India in this case. The question having been directly answered by the Supreme Court against the Department and in favour of the assessee, the reference is answered accordingly insofar as the first question is concerned.

3. The second question is also more or less covered by the Supreme Court decision, but against the assessee. Here the assessee had made some short-term deposits and had earned interest therefrom. The question was as to whether the interest was to be treated as the “business income” or was to be treated as the “income from other sources”. It seems that the Tribunal has held in favour of the assessee by holding it as ‘business income” on the basis of its earlier order passed for the asst. yrs. 1981-82 and 1982-83. The senior standing counsel for the

Department Mrs. Venkatraman, however, pointed out that the Tribunal has gone completely wrong in holding this as an income from the business inasmuch as this question has been concluded by the Supreme Court’s decision in the case of Tuticorin Alkali Chemicals & Fertilizers Ltd. vs. CIT (1997) 141 CTR (SC) 387 : (1997) 227 ITR 172 (SC) : TC S38.3460 where an identical question fell for consideration. The learned counsel after painstakingly taking us through that judgment invited our attention to the observations on p. 179 to the following effect : “The basic proposition that has to be borne in mind in this case is that it is possible for a company to have six different sources of income each one of which will be chargeable to income-tax. Profits and gains of the business or profession is only one of the heads under which the company’s income is liable to be assessed to tax. If a company has not commenced business there cannot be any question of assessment of its profits and gains of business. That does not mean that until and unless the company commences its business, its income from any other source will not be taxed. If the company even before it commences the business, invests its surplus funds, in this case, for purchase of land or different property and later sells it, the profit/gain made by the company will be assessed under the head ‘capital gain’. Similarly if a company purchases a rented house and gets rent such rent would be assessed to tax under s. 22 of the IT Act as income from house property. Likewise, a company may have income from other sources. It may buy shares and get dividend. Such dividend will be taxable under s. 56 of the Act. The company may also, as in this case, have any short-term deposit in order to earn interest, such interest will be chargeable under s. 56 of the Act.”

4. In this case, the company had not started its business and invested some amount in short-term deposit from which it earned interest. However, the contention raised was that this was the income out of the business and not otherwise. There was a basic argument made in this case that the Supreme Court had made these observations in the light of the fact that the company had not yet commenced the business. However, it is obvious that the Supreme Court had not made these observations in the light of those facts but independently thereof to straighten out the legal position. The said judgment was followed by the Division Bench of our High Court in a matter reported in South India Shipping Corporation Ltd. vs. CIT (2000) 163 CTR (Mad) 617 : (1999) 240 ITR 42 (Mad). The learned Judges after taking stock of various decisions came to the conclusion that all those decisions stood impliedly overruled by the decision in Tuticorin Alkali Chemicals, cited supra. The learned Judges also noted that the question was considered in case of the very same assessee. viz. South India Shipping Corporation Ltd. way back in the year 1983 wherein the Court had come to the conclusion in T.C.P. No. 108 of 1983 decided on 18th July, 1983, that the view taken by the Tribunal that such income is only be brought under “income from other sources” was the right view. In fact then the Court had also referred to the decision of Phillips Carbon Block Ltd. vs. CIT (1982) 28 CTR (Cal) 333 : (1982) 136 ITR 205 (Cal) : TC 25R.791 and Addl. CIT vs. Madras Fertilizers Ltd. (1979) 13 CTR (Mad) 261 : (1980) 122 ITR 139 (Mad) : TC 41R.734. The learned Judges have also commented that these three decisions were in accord with the Tuticorin Alkali Chemicals cited (supra), and that it was unfortunate that they were not brought to the notice of the High Court and the Court has, therefore, held that the Tribunal was right in holding that the interest from the bank deposits and other interest on loan to others is to be assessed under the head “income from other sources”. Situation is no different here and we have already pointed out that the assessee here has invested amounts in the short-term deposits and has earned an income therefrom. We see no reason to take any different view from the one which has been taken by the Division Bench in South India Shipping Corporation’s case. In that view we answer the second question against the assessee and hold that the interest received by the assessee from the fixed deposit surplus funds cannot be assessed under the head “Income from business”. The reference is answered accordingly.

[Citation : 268 ITR 377]

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