Interest on short-term inter-corporate deposits from surplus used for imported machinery held business income; assessee entitled to Sections 80HH, 80-I

HC upheld the Tribunal, ruling that interest on short-term inter-corporate deposits placed from surplus funds set aside to pay for imported machinery constituted business income, not income from other sources. Because the deposits were temporary, withdrawn and applied to the machinery payments, the interest formed part of business receipts; therefore the assessee was entitled to the benefits under sections 80HH and 80-I. The appeal was decided for the assessee and against the Revenue.

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Issues:
Whether interest income received by the assessee is in the nature of business income and if deduction under sections 80HH and 80-I are available.

Analysis:
The case involved a company engaged in manufacturing industrial jewels, which filed its return for the assessment year 1990-91, disclosing income and claiming deductions under sections 80HH and 80-I of the Income-tax Act. The Assessing Officer treated the interest income earned by the company as income from other sources, rejecting the explanation that short-term deposits were made to utilize funds beneficial to the company. The Commissioner of Income-tax (Appeals) allowed the appeal, treating the interest income as business income and directing the deduction under sections 80HH and 80-I to be allowed. The Income-tax Appellate Tribunal upheld the decision of the Commissioner of Income-tax (Appeals), leading to the present appeal by the Revenue.

The company's explanation for the interest income was that funds were kept aside for importing machinery, and while awaiting shipments, the funds were placed in inter-corporate deposits to earn more income than bank deposits. The appellate authority found the explanation satisfactory, noting that the funds were withdrawn and used for machinery payment, as reflected in the balance sheet for the following year. The Tribunal also found no error in the appellate authority's approach, confirming that the inter-corporate deposits were made from surplus funds for the purpose of business. It was established that the interest earned on these short-term deposits for business purposes should be treated as business income, not income from other sources.

The court ruled in favor of the assessee, dismissing the tax appeal brought by the Revenue. The decision highlighted that the interest income from short-term deposits made for business purposes should be considered business income, making the assessee eligible for deductions under sections 80HH and 80-I. The judgment emphasized that the funds were utilized for importing machinery, and the interest earned on these deposits was directly linked to the business activities of the company. As the assessee did not appear, no costs were awarded in the case.

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