1. In his income-tax reference under S. 256(1) of the I.T. Act, 1961, which is made at the instance of the Commissioner, the following question of law has been referred to us :
'Whether, on the facts and in the circumstances of the case, the interest income of Rs. 63,485 was assessable as business income or as income from other sources ?'
2. We are concerned in this reference with the assessment year 1966-67. The short point involved is whether the interest income earned by the assessee-company was assessable as business income or as income from other sources. The assessee-company was, at the relevant period, the sole agent for wall clocks and timepieces manufactured by another company, viz., Sifco Ltd. Under an agreement dated 28th June, 1962, between Sifco Ltd. and the assessee-company, the assessee-company was appointed the sole selling agent of Sifco Ltd., for the territories comprised in the Union of India. The duration of the said agreement was for five years. The other terms of the agreement are not of any particular interest for our purposes, but it may be stated that the agreement does not contain any condition or stipulation to the effect that the assessee should act as financiers for Sifco Ltd., or that it should advance any amounts to Sifco Ltd., or keep any deposits with Sifco Ltd. In actual practice however, the assessee advanced amounts to Sifco Ltd. The assessee was in a position to do this because in turn it had received deposits from various sub-distributors appointed by it for wall clocks and timepieces.
3. We may now refer to the accounts of the previous year ended on 31st March, 1966. At the beginning of the year Sifco Ltd., owned to the assessee Rs. 9,28,000 in the account which was styled 'Advances to Sifco Ltd. Account'. During this year, there were no fresh advances but various amounts were repaid by Sifco Ltd., so that the debit balance against Sifco Ltd. stood at the lower figure of Rs. 6,67,871 on 31st March, 1966. Against these advances the assessee received interest of Rs. 72,771. It may be mentioned that the assessee had an overdraft, on which interest of Rs. 9,286 was paid. The surplus of Rs. 63,485 in the interest account was treated by the ITO as income from other sources on the plea that the agreement between the assessee and Sifco Ltd. did not contain any stipulation about keeping any amount as deposit or making any advances. In the view of the ITO, the assessee had kept its surplus money in fixed deposit with Sifco Ltd., with a view to earn interest and the interest earned, therefore, was taxable as income from other sources.
4. The assessee was aggrieved by this order for the simple reason that if interest income was taken under other sources, it could not be set off against its business losses which had been carried forward. Accordingly, an appeal was filed before the AAC, who, however, agreed with the ITO. The AAC also based his appellate order on the absence of any condition in the agreement regarding giving of any loans or advances or keeping any amount as deposit.
5. The assessee then carried the matter in further appeal before the Income-tax Appellate Tribunal. Before the Tribunal, it was contended on behalf of the assessee that the advances given to Sifco Ltd., were in the course of carrying on the assessee's business and that the fact that there was no condition in the agreement between Sifco Ltd. and the assessee, requiring the assessee to find finances for the manufacturing company, made no difference to the nature of the advances. Before the Tribunal reference was made to the audited accounts of Sifco Ltd., from which the necessity for that company to have loans for the purpose of carrying on its business could be established. The subscribed capital of the said company was about Rs. 19 lakhs, whereas the total assets were of the value of Rs. 49 lakhs including fixed assets of Rs. 28, lakhs. Sifco Ltd. were required to obtain loans and they had obtained over Rs. 16 lakhs from various banks and Industrial Finance Corporation; it had secured the remaining amount from the assessee. It was urged on behalf of the assessee before the Tribunal that it was in the assessee's interest to see that Sifco Ltd.'s manufacturing activities were not hampered by lack of funds. The assessee had a direct interest in these manufacturing activities and accordingly it was contended that the advance of funds by the assessee must be regarded as having been made for commercial reasons even if there was no legal or contractual obligation to make such advances.
6. Having heard the rival submissions, the Tribunal took the view that the interest income received by the assessee should be assessed as business income. The Tribunal was unable to accept the department's contention that the assessee had a different activity, viz., earning income from other sources by taking advances from sub-distributors and lending them. It considered the nature of the advances, the reasons for the advances and the sources of the money from which advances were given; and taking an overall view of the entire transaction, it observed that this was not an investment of idle funds but advances made to a company in order to facilitate its manufacturing activities, in which activities the assessee was vitally interested. Accordingly, the Tribunal allowed the appeal and directed that the interest income should be assessed as business income.
7. Mr. Pandit on behalf of the Commissioner has repeated the submissions which found favour with the ITO and the AAC. We, however, find that the approach adopted by the Tribunal to be found contained in para. 5 of its appellate order is the proper approach and the Tribunal has considered the problem from a proper perspective. One an overall picture is taken of the nature of the transaction and the reasons for the advances, it appears to us that no conclusion other than the one reached by the Tribunal is possible on the facts and in the circumstances of the case. The assessee was not carrying on any activity of advancing its idle funds, but in fact had advanced its funds collected by way of deposits from sub-distributors and from the bank overdraft to Sifco Ltd., in whose manufacturing activities the assessee was vitally interested. Once the nature of that interest is realised, it has to be held that the advances were made out of commercial considerations and for commercial reasons. Once the close link up between the advances and the agreement is established, the interest earned will have to be regarded as business income although there may be no stipulation in the agreement compelling the assessee to make any advances to Sifco Ltd.
8. In the result, we fully agree with the Tribunal and the question referred to us is answered as follows :
9. On the facts and in the circumstances of the case, the interest income of Rs. 63,485 was assessable as business income and not as income from other sources.
10. The Commissioner will pay to the assessee the costs of this reference.