Ajit K. Sengupta, J.
1. In this reference made at the instance of the Revenue, the following questions have been referred by the Tribunal for the opinion of this court under Section 256 of the Income-tax Act, 1961:
'1. Whether, on the facts and in the circumstances of the case, the Tribunal was correct in law in holding that the royalty of Rs. 3,43,600 was allowable in the assessment year 1972-73
2. Whether, on the facts and in the circumstances of the case while restoring the issue to the Income-tax Officer relating to the determination of the chargeable head of the interest accrued on fixed deposits, the Tribunal was justified in law in observing that the earning of interest on the fixed deposits could not be isolated from paying of interest by the assessee on the deposits received from the public
3. If the answer to question No. 2 above is in the affirmative, then whether the Tribunal was correct in law to hold that the interest accrued on fixed deposits should be assessed under the head 'Business income' ?'
2. This reference relates to the income-tax assessment of the assessee-company for the financial year ending on March 31, 1972, being the previous year relevant to the assessment year 1972-73. The facts as found by the Tribunal are as under :
In terms of an agreement executed between the assessee-company and Oberoi Hotels (India) Pvt. Ltd. on June 15, 1972, the hotels owned by the assessee-company became entitled to use the name 'Oberoi' against payment of compensation calculated at Rs. 600 per guest room per year. This agreement was effective from April 1, 1970. The previous year of the assessee-company for the matter under reference ended on March 31, 1972; but the audit of accounts for the relevant previous year was completed and finalised some time in August, 1972. While finalising the accounts for the year ending March 31, 1972, the assessee-company made provision for payment of royalty in the sum of Rs. 6,91,200 in terms of the said agreement executed on May 18, 1972. This provision was made for the period April 1, 1970, to March 31, 1972. The Income-tax Officer allowed deduction in the sum of Rs. 3,45,600 for the period April 1, 1971, to March 31, 1972, corresponding to the assessment year 1972-73 ; but he did not allow any deduction for the balance sum of Rs. 3,45,600 relating to the period April 1, 1970, to March 31, 1971, on the ground that although the assessee maintained accounts on mercantile basis, it did not give any suitable explanation for not charging this sum of Rs. 3,45,600 in the immediately preceding year, that is to say, previous year relevant to the assessment year 1971-72. The disallowance made by the Income-tax Officer was later confirmed on appeal by the Commissioner of Income-tax (Appeals). The assessee filed second appeal to the Income-tax Appellate Tribunal. It was submitted before the Tribunal on behalf of the assessee that it was using the word 'Oberoi' in terms of the resolution passed on August 11, 1970. But no payment of royalty could be made without the approval of the Industrial Finance Corporation of India from whom the assessee-company had borrowed certain funds. The formal agreement for payment of royalty to Oberoi Hotels (India) Pvt. Ltd. could be executed only on June 15, 1972, after obtaining the approval of the Industrial Finance Corporation of India through its letter dated May 18, 1972. The Tribunal noted that the accounts for the previous year relevant to the assessment year 1972-73 now in reference before us were finalised and signed only on August 22, 1972. Since the agreement providing for payment of royalty with retrospective effect from April 1, 1970, had already been signed on June 15, 1972, the entire royalty relating to the period April 1, 1970, to March 31, 1972, was rightly provided in the accounts for the year ending March 31, 1972,following the publication of the Institute of Chartered Accountants of India titled 'Contingencies and events occurring after the balance-sheet date'.
3. In this view of the matter, the Tribunal directed that the liability of Us. 3,45,600 relating to the period April 1, 1970, to March 31, 1971, was rightly allowable as a business expenditure in the assessment for the assessment year 1972-73.
4. We have not been able to appreciate the reasoning given by the Tribunal for accepting the claim made by the assessee in respect of the deduction of Rs. 3,45,600. It is an undisputed fact that this sum related to the royalty payment for the immediately preceding previous year commencing on April 1, 1970, and ending on March 31, 1971. The assessment under reference is for the previous year commencing on April 1,1971. and ending on March 31, 1972. The liability for the preceding year which arose as a result of the agreement admittedly executed on June 15,1972. can, by no stretch of imagination, be allowed as a business expenditure in the year under reference. The liability for payment of expenditure by way of royalty arose as a result of the agreement executed on June 15, 1972. This can lawfully be claimed as a business expenditure only in the previous year commencing on April 1, 1972, and ending on March 31, 1973. The publication of the Institute of Chartered Accountants of India titled 'Contingencies and events occurring after the balance-sheet date' has nothing to do with the issue involved in this reference. Since the agreement between the assessee-company and Oberoi Hotels (India) Pvt. Ltd., under which the liability to pay royalty arose could not have been admittedly executed without the approval of the Industrial Finance Corporation of India from whom the assessee-company had borrowed certain funds and when admittedly the Industrial Finance Corporation of India granted approval to the proposed agreement only by its letter dated May 18, 1972, the liability to pay the royalty could have never accrued prior to the date of execution of the agreement.
5. In that view of the matter, we answer the first question referred by the Tribunal in this case in the negative and in favour of the Revenue.
6. Coming now to the other two questions referred by the Tribunal, we find that the only issue involved therein relates to the head of income under which interest on fixed deposits should be assessed to income-tax. In this respect, the Tribunal has recorded that the assessee-company was accepting deposits from the public in accordance with the provisions of the Companies (Acceptance of Deposits) Rules, 1975. These deposits were received and accepted by the assessee-company in the course of and forthe purposes of business. Rule 3A of the Companies (Acceptance of Deposits) Rules, 1975, requires every company to deposit or invest, as the case may be, a sum which shall not be less than 10 per cent. of the amount of its deposits maturing during the year ending on March 31, next following, in one or more methods specified therein. One of the modes of investment specified in Rule 3A is deposit in a current or other deposit account with any scheduled bank free from charge or lien. Sub-rule (2) of Rule 3A further provides that the amount deposited or invested under Sub-rule (1) shall not be utilised for any purpose other than for the repayment of deposits maturing during the year referred to in that sub-rule. It was contended on behalf of the assessee-company before the Tribunal that the interest payable by the assessee-company on the deposits accepted from the public under the Companies (Acceptance of Deposits) Rules, 1975, have been allowed as business expenditure. The Tribunal noted that full facts were available from the order of the authorities below and, therefore, it was not in a position to finally decide the issue. The Tribunal observed that, if the facts as, stated by the assessee-company were correct, the earning of income by way of interest on fixed deposits made by the assessee-company pursuant to Rule 3A of the Companies (Acceptance of Deposits) Rules, 1975, could not be isolated from the payment of interest made by the assessee-company on the aggregate deposits received and accepted by it from the public and admittedly used for the purpose of business.
7.In our view, the Tribunal was fully justified in taking the aforesaid view. Making of fixed deposits with a scheduled bank to the extent of ten per cent. of the deposits accepted is a mandatory requirement under Rule 3A of the Companies (Acceptance of Deposits) Rules, 1975. The earning of interest on such fixed deposits is directly incidental to the receipt and acceptance of the aggregate deposits from the public and payment of interest thereon. The interest on fixed deposits in these circumstances must go to reduce the aggregate payment of interest made by the assessee-company on the total deposits accepted under the said rules. If the deposits are accepted and used for the purposes of business, the net expenditure by way of interest on deposits after deducting from the gross interest the interest earned on the fixed deposits is a business expenditure. If the entire payment on aggregate deposits is treated as business expenditure, the interest received on fixed deposits made under Rule 3A must be treated as business income and assessed to tax under the head 'Profits and gains of business or profession'.
8. In this view of the matter, we answer questions Nos. 2 and 3 in the affirmative and in favour of the assessee.
9. There will be no order as to costs.
Shyamal Kumar Sen, J.
10. I agree.