SHIPRA SHIP BUILDERS PVT. LTD. V. ASSTT. COMMISSIONER OF INCOME TAX

TAXAP/1281/2006

AI Insights

The case involves Shipra Ship Builders Pvt. Ltd., the appellant, contesting an order by the Income Tax Appellate Tribunal which had favored the revenue's stance on taxing interest income as 'income from other sources'. The dispute centered on whether the interest earned from a deposit, which was a mandatory pre-condition for securing raw materials, should be taxed under the head of 'income from other sources' or considered as part of the business income. The High Court referenced its earlier decisions and Supreme Court judgments to conclude that such interest income, directly linked to business operations, should not be taxed under 'income from other sources'.

• Counselvise Citation: [2014] 140 COUNSELVISE.COM (IT) 753925 (HC-GUJARAT)
• Appeal Type: Others
• Pronouncement Date: 01-12-2014
• Assessment Year: misc
• Other Referred Cases: Tax Appeal No.186 of 2003, Tax Appeal No.371 of 2002, Tax Appeal No.257 of 2000, Tax Appeal No.256 of 2000, Tax Appeal No.257 of 2000, Karnal Cooperative Sugar Mills Ltd vs. CIT, Tuticorin Alkali Chemicals & Fertilizers Ltd. vs. CIT, CIT vs. Bokaro Steel Ltd., Jaypee DSC Ventures Ltd vs. Delhi High Court, Pandian Chemicals Ltd vs. CIT
• Laws Referred To: Income Tax Act
• Result in Favour of: Others
• Court: HIGH COURT
• Department Lawyers: PG DESAI
• Assessee Lawyers: R K PATEL
• Keywords: Business income; Income from other sources; Interest income; Tax appeal
• Section: 143(3)

Judgement Text

"O/TAXAP/1281/2006 JUDGMENT IN THE HIGH COURT OF GUJARAT AT AHMEDABAD TAX APPEAL NO. 1281 of 2006 FOR APPROVAL AND SIGNATURE: HONOURABLE MR.JUSTICE KS JHAVERI and HONOURABLE MR.JUSTICE K.J.THAKER ================================================================ 1 Whether Reporters of Local Papers may be allowed to see the judgment ? 2 To be referred to the Reporter or not ? 3 Whether their Lordships wish to see the fair copy of the judgment ? 4 Whether this case involves a substantial question of law as to the interpretation of the Constitution of India, 1950 or any order made thereunder ? 5 Whether it is to be circulated to the civil judge ? ================================================================ SHIPRA SHIP BUILDERS PVT. LTD.....Appellant(s) Versus ASSTT. COMMISSIONER OF INCOME TAX....Opponent(s) ================================================================ Appearance: MR RK PATEL, ADVOCATE for the Appellant(s) No. 1 MR. P.G. DESAI, ADVOCATE for the Opponent(s) No. 1 ================================================================ CORAM: HONOURABLE MR.JUSTICE KS JHAVERI and HONOURABLE MR.JUSTICE K.J.THAKER Page 1 of 7 O/TAXAP/1281/2006 JUDGMENT Date : 01/12/2014 ORAL JUDGMENT (PER : HONOURABLE MR.JUSTICE KS JHAVERI) 1. By way of this appeal, the appellant­ assessee has challenged the order dated 06.02.2006 passed by the Income Tax Appellate Tribunal [for short “the Tribunal”] in ITA No.960/RJT/2004, whereby the appeal preferred by the revenue was allowed by the Tribunal. 2. The facts in brief are that the appellant­ assessee is engaged in the business of Building Ships. For the assessment Year 1998­99, the return of income was filed by the assessee. The Assessing office passed an order under Section 143(3) of the Income Tax Act on 22.1.2001 and made an addition of Rs.9,86,430/­. Against the order of the Assessing Officer, the assessee filed an appeal before the Commissioner of Income Tax. The CIT(A) partly allowed the said appeal . 2.1. Being aggrieved and dissatisfied with the order of the CITA, the revenue has filed an appeal before the Income Tax Appellate Tribunal. The Tribunal vide order dated 06.02.2006 allowed the appeal of the revenue. Hence, this appeal is filed at the instance of the assessee. 3. While admitting this appeal on 21.06.2007, the Court had formulated the following substantial Page 2 of 7 O/TAXAP/1281/2006 JUDGMENT question of law:­ “ Whether on facts the Tribunal is right in law in holding interest of Rs. 9,86,430/­ arising out of mandatory pre­condition deposit towards supply of raw material is taxable as “income from other sources”?” 4. Learned counsel for the appellant has submitted that the Tribunal has committed an error in reversing the order of the CIT(A). He relied upon unreported decision of this Court passed in Tax Appeal No.186 of 2003 and other allied matter decided on 14.10.2014 and contended that the question of law involved in this appeal is covered by the above decision. He, therefore, urged that in view of the above decision, the present appeal deserves to be allowed. 5. Learned advocate for the respondent is not in a position to distinguish the decision relied upon by learned advocate for the appellant rendered in Tax Appeal No.186 of 2003 and other allied matters. 6. We have heard learned advocates appearing for both the parties and perused the material on record. The question of law involved in this appeal is concluded by this Court in Tax Appeal No.186 of 2003 and other allied matters. In paragraph Nos. 8, 9, 9.1 and 10, it has been observed as under:­ Page 3 of 7 O/TAXAP/1281/2006 JUDGMENT “8. So far as question no. 2 of Tax Appeal Nos. 186 of 2003 and 371 of 2002 is concerned, the institution with which the assessee was carrying on business is required to be borne in mind. The interest from Bajaj Institution has direct nexus with the business and therefore the interest is required to be considered as derived from business. Question no. 2 is therefore answered in the affirmative i.e. in favour of the assessee and against the revenue. 9. So far as the question raised in Tax Appeal No. 187 of 2003 is concerned, the issue is squarely covered by the decision of this Court Tax Appeal No. 257 of 2000 with Tax Appeal No. 256 of 2000 as well as the decision of the Apex Court in the case of Karnal Co­operative Sugar Mills Ltd (supra). The Apex Court in the case of Karnal Co­operative Sugar Mills Ltd (supra) has observed 2. In the present case, the assessee had deposited money to open a letter of credit for the purchase of the machinery required for setting up its plant in terms of the assessees agreement with the supplier. It was on the money so deposited that some interest has been earned. This is, therefore, not a case where any surplus share capital money whichis lying idle has been deposited in the bank forhte purpose of earning interest. The deposit of money in the present case is directly linked with the purchase of plant and machinery. Int his view of the matter the ratio laid down by this Court in Tuticorin Alkali Chemicals & Fertilizers Ltd. vs. CIT [1997] 227 ITR 172 will not be attracted. The more appropriate decision in the factual situation in the present case is in CIT vs. Bokaro Steel Ltd. [1999] 236 ITR 315 (SC). The appeal is dismissed. Page 4 of 7 O/TAXAP/1281/2006 JUDGMENT There will be no order as to costs. 9.1 Similarly the relevant observations made in Tax Appeal No. 257 of 2000 by this Court are as under: 13. In the present case, the assessee's stand has consistently been that due to insistence of the financial institutions, the assessee was compelled to park certain amount in fixed deposits from which it earned interest of 12 per cent, whereas the market rent at the relevant time was higher. Such interest income was utilized for the purpose of assessee's business by purchasing new machinery. In short, the assessee contended that such income cannot be treated as income from other sources, but must be seen as part of the assessee's business income. 15. In view of the exercise already undertaken by the Delhi High Court in the case of Jaypee DSC Ventures Ltd (supra), we may not separately refer to in detail the facts and ratio of the various decisions of the Supreme Court, noted above. Suffice it to conclude, in the present case also, the assessee was compelled to park a part of its funds in fixed deposits under the insistence of the financial institutions. On such funds, the assessee received interest. Such income cannot be treated as income from other sources and must be seen as part of the assessee's business of manufacturing and selling of chemicals. The decision of the Apex Court in the case of Pandian Chemicals Ltd. (supra) would not be applicable. In the said case, the Apex Court was interpreting the phrase 'derived from' used in section 80HH of the Act. It was in this background that the Apex Court held Page 5 of 7 O/TAXAP/1281/2006 JUDGMENT that the words 'derived from' must be understood as something which has a direct or immediate nexus with the assessee's industrial undertaking. It was on that basis that the Apex Court held that interest derived by the industrial undertaking of the assessee on deposits made with the Electricity Board for the supply of electricity for running the industrial undertaking could not be said to flow directly from the industrial undertaking. 10. Thus, it is clear that the income earned from fixed deposit placed for business purpose cannot be treated as income from other source but must be seen as part of the assessees business income. In the present case also the assessee was compelled to park a part of its funds in fixed deposits under the insistence of the financial institutions and therefore the income received thereupon cannot be termed to be income from other sources. 7. In view of the aforesaid decision, the question of law raised in this appeal is required to be answered in favour of the assessee as the question raised is no longer res integra and will govern this case also as facts and law applicable are similar. Accordingly, we answer the question raised in this appeal in favour of the assessee and against the revenue. The appeal is allowed. (K.S.JHAVERI, J.) Page 6 of 7 O/TAXAP/1281/2006 JUDGMENT (K.J.THAKER, J) pawan Page 7 of 7 "