1981 (8) TMI 50 - HC - Income Tax

Bank deposits must be included in capital computation for tax relief under Income-tax Act.

The High Court held that short-term and fixed bank deposits should be included in the capital computation for relief under Section 84 of the Income-tax ... New Industrial Undertaking, Relief Issues Involved:1. Inclusion of short-term and fixed bank deposits in capital computation for relief under Section 84 of the Income-tax Act, 1961.2. Interpretation of Rule 19(4) of the Income-tax Rules, 1962.3. Classification of bank deposits as investments.4. Determination of whether bank deposits are required for business purposes.Issue-wise Detailed Analysis:1. Inclusion of Short-term and Fixed Bank Deposits in Capital Computation for Relief under Section 84 of the Income-tax Act, 1961:The central question was whether the short-term and fixed bank deposits should be included in the capital computation for the purpose of working out relief under Section 84 of the Income-tax Act, 1961. The Appellate Tribunal held that these deposits could not be included in the capital computation. The judicial Member of the Tribunal emphasized that the deposits were necessary for tax payments and were part of the circulating capital of the business. The Accountant Member and the Vice-President, however, disagreed, noting that the income from these deposits was assessed under 'Other sources' and not included in the business profits, thus excluding them from the capital computation.2. Interpretation of Rule 19(4) of the Income-tax Rules, 1962:Rule 19(4) stipulates that investments whose income is not taken into account in computing business profits and moneys not required for business purposes should be excluded from the capital computation. The judicial Member contended that the deposits were part of the circulating capital and necessary for tax payments, thus should not be excluded. The Accountant Member and the Vice-President argued that since the interest income from these deposits was assessed under 'Other sources,' they should be excluded from the capital computation.3. Classification of Bank Deposits as Investments:The term 'investment' was scrutinized to determine if bank deposits fall under this category. The judgment referred to commercial practices and legal precedents, concluding that deposits, especially short-term ones, are not typically considered investments. The judicial Member argued that deposits made for tax payments should not be classified as investments. The judgment cited Price v. Newton, which distinguished between deposits and investments, supporting the view that bank deposits are not investments.4. Determination of Whether Bank Deposits are Required for Business Purposes:The judicial Member argued that the deposits were necessary for business purposes, specifically for tax payments, and thus should be included in the capital computation. The Accountant Member and the Vice-President maintained that since the interest income was assessed separately and the deposits were not immediately necessary for business operations, they should be excluded. The judgment referenced CIT v. Cocanada Radhaswami Bank Ltd., which allowed the inclusion of interest income from securities as part of business income if the securities were trading assets, supporting the view that deposits for tax payments are required for business purposes.Conclusion:The High Court concluded that the short-term and fixed bank deposits should be included in the capital computation for relief under Section 84 of the Income-tax Act, 1961. The judgment emphasized that these deposits were part of the circulating capital and necessary for tax payments, thus fulfilling the conditions of Rule 19(4). The court answered the question in the negative, favoring the assessee, and stated that the parties would bear their own costs.