Liquidation interest on short-term fixed deposits is income from other sources, not business income, when assets are merely parked pending distribution.
Interest earned by the official liquidator on short-term fixed deposits created from realised assets pending distribution in winding up was held not to be business income. The High Court reasoned that, once the company was compulsorily wound up, its banking business had ended and the liquidator's role was limited to realising assets and distributing proceeds. Temporary parking of surplus funds in fixed deposits did not amount to carrying on the company's business, and section 28(4) of the Income-tax Act did not apply because the liquidator was not conducting business activity. The interest was therefore taxable as income from other sources, and the Revenue's position succeeded.
Issues: Whether interest earned by the official liquidator on short-term fixed deposits, made out of realised assets pending distribution in winding up, was assessable as business income or as income from other sources.
Analysis: The company's main banking business had come to an end on compulsory winding up, and the liquidator's functions were confined to realisation of assets and distribution of the proceeds. Mere investment of surplus realisations in short-term deposits pending distribution did not amount to carrying on the business of the company. Section 28(4) of the Income-tax Act, 1961 did not assist the assessee because the liquidator was not engaging in a business activity but only performing liquidation duties. The activity was not treated as a continuation of banking or investment business under the Banking Regulation Act, 1949.
Conclusion: The interest on fixed deposits was not business income and was rightly taxed as income from other sources, against the assessee.
Final Conclusion: The reference was answered on the central tax issue in favour of the Revenue, and the assessee's claim to treat the interest as business income failed.
Ratio Decidendi: Where a company is in liquidation and the liquidator merely realises assets and temporarily invests the proceeds pending distribution, such activity does not constitute carrying on the company's business for income-tax purposes.
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