Taxability of interest on sale proceeds depends on ownership of the underlying asset and proceeds, with separate treatment for pledged goods and hire-purchase assets.

Interest on deposited sale proceeds is taxable according to ownership of the underlying proceeds. Where lorries were under hire-purchase and belonged to the financiers, the sale proceeds and the interest on their deposit were treated as the financiers' property, so the interest was not assessable in the assessee-company's hands. By contrast, timber logs pledged with bankers remained the company's property; the sale proceeds and the interest earned on their deposit retained that character, so the interest was assessable in the company's hands. The tax position therefore differed between the two classes of assets, producing only partial taxability of the interest income.

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Issues: (i) Whether interest earned on the deposit of sale proceeds of lorries held under hire-purchase arrangements was taxable in the hands of the assessee-company. (ii) Whether interest earned on the deposit of sale proceeds of timber logs pledged with bankers was taxable in the hands of the assessee-company.

Issue (i): Whether interest earned on the deposit of sale proceeds of lorries held under hire-purchase arrangements was taxable in the hands of the assessee-company.

Analysis: The lorries were found, on the Tribunal's finding and the agreed facts, not to be the property of the company but of the respective financiers. The sale proceeds represented the property of those owners, and the interest accruing on the deposit of those proceeds followed the same ownership. The description of the financiers as preferential creditors did not alter their ownership in the lorries or the character of the proceeds.

Conclusion: The interest attributable to the sale proceeds of the lorries was not assessable in the hands of the assessee-company.

Issue (ii): Whether interest earned on the deposit of sale proceeds of timber logs pledged with bankers was taxable in the hands of the assessee-company.

Analysis: The timber logs belonged to the company, and the creditors had only security rights as pledgees. The proceeds realised on sale of the logs therefore belonged to the company, and the interest earned on the deposit of those proceeds retained that character.

Conclusion: The interest attributable to the sale proceeds of the timber logs was assessable in the hands of the assessee-company.

Final Conclusion: The reference was answered by distinguishing between the lorries and the timber logs, with taxability rejected for the former and upheld for the latter, resulting in only a partial tax liability on the interest income.

Ratio Decidendi: Interest on deposited sale proceeds is taxable in the hands of the person who owns the underlying proceeds; where the asset belongs to third-party financiers under hire-purchase, the interest accrues to them, while proceeds of goods owned by the assessee and merely encumbered by a pledge remain taxable in the assessee's hands.

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