Kalpesh Classes

Professional photographer / sportsman

251 ITR 0360 ​​ COMMISSIONER OF INCOME-TAX VS. AVINASH PASRICHA (DEL) The definition​​ of "income" in section 2(24) was inclusive, the purpose of the definition was not to limit the meaning of "income" but to widen its net, and the several clauses therein were not exhaustive of the meaning of income. ​​ Even if a receipt did not fall within the ambit of any of those clauses, it might still be income if it partook of the nature of income.

The assessee an individual derived income from his profession as a photographer. In an all-India photography contest the assessee won the first prize and received a cash award of Rs. 30,000. He claimed that the said receipt did not bear the character of income and was, therefore, not taxable. Held, that the award of Rs. 30,000 was taxable as income.​​ 

Scope of heads of income – interest income

Where the main​​ business of the assessee is income from civil contracts with money-lending only as subsidiary activity, the question that arose in Ferro Concrete Construction (India) P. Ltd. v. CIT [2007] 290 ITR 713 (MP) was whether interest income on bank deposits should be assessed as income from business or other sources. It was decided that bank interest including that from in short term deposits is assessable under other sources following the decision in Tuticorin Alkali Chemicals and Fertilizers Ltd. v. CIT [1997] 227 ITR 172 (SC), though the facts were admittedly “slightly different”. The decision in Tuticorin Alkali Chemicals’ case had not been followed in CIT v. Bokaro Steel Ltd. [1999] 236 ITR 315 (SC), CIT v. Karnal Co-operative Sugar Mills Ltd. [2000] 243 ITR 2​​ (SC) and CIT v. Karnataka Power Corporation [2001] 247 ITR 268 (SC) and finally be treated as overruled in Bongaigaon Refinary and Petrochemicals Ltd. v. CIT [2001] 251 ITR 329 (SC). Again a significant distinction is that Tuticorin Alkali Chemicals’ case​​ dealt with the receipt of interest before the commencement of business, so that it could have had no application to the case before the High Court. Strangely, even income from sale of empty bags, containers and drums acquired and used in the assessee’s contract business was sought to be treated as income from other sources by the Tribunal. But the High Court mercifully found on this point that these were part of the assessee’s day to day business, so that it could be treated as income from business. “Other​​ Sources” is a residuary head of income, so that what will fall to be assessed under “Other Sources” is only income which cannot fall under any other head.​​ 

In CIT v. Motlay Finance P. Ltd. [2007] 290 ITR 719 (MP), the issue was whether the income of the assessee from dealing in investments, shares, securities and debentures consistent with the objects of the company offered by the assessee as business income was correct. It appears that the Revenue wanted to make a distinction between transactions in quoted securities in the stock exchange and those which were unquoted. It was found that this could make no difference. The High Court, therefore, decided that there was no substantial question of law, so as to justify interference with Tribunal’s decision.

Where the assessee makes an investment by way of fixed deposit with a bank as a condition for getting bank guarantee for purposes of his contract business, such interest income can only be considered as business income. It was so decided in CIT v. Chinna Nachimuthu Constructions [2008] 297 ITR 70 (Karn).​​ In coming to the conclusion, the High Court followed the decision in another contractor’s case in CIT v. Govinda Choudhury and Sons ​​ [1993] 203 ITR 881 (SC). It is often overlooked that section 56 providing for income from other sources is a residuary one. It is only where an income does not fall under any of the other regular sources of income, there should be need for invoking section 56. Where a person has only one source of income and that is business, there could hardly be any other inference.​​ In Snam Progetti S. P. A. v. Addl. CIT [1981] 132 ITR 70, the Delhi High Court took a broad view and considered interest income as incidental to and, therefore, business income, because it cannot be presumed that the​​ assessee had come all the way from Italy to make bank deposits in India, when it was clear that the company was established for carrying on business. In CIT v. Tamil Nadu Dairy Development Corporation Ltd. [1995] 216 ITR 535, the Madras High Court has held​​ following the decision of the Supreme Court in CIT v. Calcutta National Bank Ltd. ​​ [1959] 37 ITR 171, that “business” is a word of very wide connotation with the result, that it should ordinarily be treated as business income.​​ Except where the investments​​ are independent of business made out of surplus funds in long term deposits, there is no possibility of assessing such income under “other sources”.​​ 

Interest on securities​​ 

Though for the purpose of computation of the income, interest on securities is​​ separately classified, income by way of interest from securities does not cease to be part of the income from business if the securities are part of the trading assets - CIT V/s. Co Canada Radhaswami Bank Ltd. [1965] 57 ITR 306 (SC)

Dividend income​​ 

The​​ mere circumstances that the assessee had shown the dividend income under the head “Income from other sources” in its returns could not in law decide the nature of the dividend income. It had to be determined whether, having regard to the true nature and character of the income, it could be described as income from business, even though it fell for computation under another head - Brooke Bond & Co. Ltd. V/s. CIT [1986] 162 ITR 373 (SC).

Interest on temporary deposits

In CIT v. Lok Holdings [2010]​​ 189 Taxman 452​​ (Bom.), the assessee in the course of its business of development of properties received monies in advance from its customers intending to​​ purchase flats in the properties developed by it. Since those monies could not be utilized immediately for the business of the firm, the assessee invested the surplus amount temporarily in the banks and other concerns and earned interest on such deposit and claimed it as business income.​​ 

Where a real estate developer receives advances from intending purchasers and derives interest income from the bank on deposit of such advances, such interest income is income from business as held in CIT v. Lok Holdings [2009] 308 ITR 356 (Bom) following CIT v. Paramount Premium P. Ltd. [1991] 190 ITR 259 (Bom), inter alia, distinguishing the case of the Supreme Court in Tuticorin Alkali Chemicals and Fertilisers Ltd. v. CIT [1997] 227 ITR 172 as relating to a business, which had not commenced during the year.

​​ 

Interest on finance business

287 ITR 0479- ​​ Commissioner of Income-tax vs. Koshika Telecom Ltd.​​ (Delhi High Court) Interest income ordinarily falls under the head “Other sources”. But where it is linked by nexus with business, such income may well be liable to tax only as business income.​​ It was so held in CIT v. Koshika Telecom Ltd. [2006] 287 ITR 479 (Delhi), where an assessee operating cellular mobile telephone services had deposited margin money to obtain licence with such deposit earning interest, such interest being linked to business is assessable as business income. The authorities relied upon​​ the decision in Tuticorin Alkali Chemicals and Fertilizers Ltd. v. CIT [1997] 227 ITR 172 (SC) overlooking the fact that it has no application where such deposits are inextricably linked to the requirement of furnishing bank guarantee and not mere investment of surplus funds, so that the later decisions in CIT v. Bokaro Steel Ltd. [1999] 236 ITR 315 (SC) and CIT v. Karnal Co-operative Sugar Mills Ltd. [2000] 243 ITR 2 (SC) were to be followed. The decision to this effect by the Tribunal cannot raise a question of law and much less a substantial question of law.

The deposit of the margin money by the assessee with the banks was inextricably linked to the furnishing of the bank guarantees by the assessee to the Department of Telecommunications for obtaining a​​ licence. Hence, the interest was assessable as business income.​​ 

Broken period interest

In CIT v. Bank of Rajasthan Ltd. [2009]​​ 178 Taxman 304​​ (Raj.), the assessee-bank purchased certain securities-cum-interest and, thus, the composite purchase consideration also comprised of issue price and accrued interest (broken period interest) uptill the date of purchase. The question in this case was whether the bank was entitled to have deduction of this element of interest from its income.​​ The Tribunal in the first leg quashed the order under section 263 on the premise that if the securities are held as stock-in-trade, the entire consideration including​​ the interest element is allowable as revenue deduction, by way of cost of purchases.​​ It drew reference to the Bombay High Court judgment in American Express International Banking Corporation v. CIT [2002] 258 ITR 601/125 Taxman 488.

The Rajasthan High Court, however, chose to distinguish the Bombay High Court decision and instead followed the ratio of the decision of the Supreme Court in Vijaya Bank Ltd. v. Addl. CIT [1991] 187 ITR 541/57 Taxman 152. It, thus, held that it is not permissible to post-mortem​​ the purchase component of an asset since the scheme of the Income-tax Act does not permit deduction of interest element paid as business expenditure.

Where parties were debited with stipulated interest, but such interest was credited only to a suspense account and not carried to the profit and loss account, is it open to the Assessing Officer to bring to tax such income ? This was the issue that was raised in American Express International Banking Corporation v. CIT [2002] 258 ITR 601 (Bom). In coming to the conclusion, the High Court followed the decision in UCO Bank v. CIT [1999] 237 ITR 889 (SC).​​ 

Another issue decided in this case related to the treatment of interest from Government securities. The method of accounting followed was to split up the consideration paid and also received as between accrued interest and principal amount, so that the interest receivable for the broken period was set off against interest payable for such period.​​ It was held that the Assessing Officer was not justified in taxing​​ the interest receivable, while disallowing interest payable.​​ In coming to the conclusion, the High Court had to meet the decision of the Supreme Court in Vijaya Bank v. Addl. CIT [1991] 187 ITR 541 as well as the decision in United Commercial Bank Ltd. v.​​ CIT [1957] 32 ITR 688 (SC). But it was found that they were distinguishable in the context of assessment of such income in these cases under the head “Other sources”. Interest on securities for a bank, in view of the requirement of maintenance of Statutory​​ Liquidity Ratio (SLR) in Government securities, would be assessable as business income as was pointed out in CIT v. Cocanada Radhaswami Bank Ltd. [1965] 57 ITR 306 (SC). If it is so assessable as income from business, the method of accounting regularly followed cannot be faulted.​​ It was also further pointed out that the assessee’s method of accounting did not result in loss to the Revenue, so that there was no need for interference​​ with the method adopted.​​ This decision on this point should avoid the​​ subsisting controversy based upon the application of Vijaya Bank’s case in the case of most banks.

Bookmaker hedge with bookmaker

A bookmaker is allowed to make a hedge bet with another bookmaker only to the extent of the total amount of bets accepted by​​ him on a particular horse at the time of such lay over.​​ The assessee, an individual, ran the business of booking races. He also bet on horse races in order to minimize probable losses. Such winnings were popularly called as “tote winnings”.​​ In the opinion​​ of the Assessing Officer, the tote winnings were covered under section 56(2) of the Income-tax Act, 1961, and the assessee was to be taxed at a flat rate as provided under section 115BB. The Commissioner (Appeals) held that the winnings were not assessable​​ under section 115BB. On appeal to the Tribunal Held, that the total amount received by the assessee from the bets laid over by the assessee with another bookmaker could not be treated as the winnings from horse race as commonly perceived in the case of a​​ punter. It was an integral part of the assessee’s business activity as a bookmaker provided the total amount of such hedge betting did not exceed the total amount of the bets accepted by him on a particular horse at the time of such hedging. It was thus to​​ be​​ treated as part and parcel of the assessee’s business receipts or payments as a bookmaker.​​ It could not be assessed at the maximum marginal rate specified under​​ section 115BB.​​ 

Income from winnings from races including horse races is taxable under the head “Other sources” along with income from lotteries, etc. under section 2(24)(ix) read with section 56(2)(ib) of the Act. The bookmakers indulged in the business​​ of booking races and also bet on horse races by way of hedging to minimise probable losses with such winnings known as “tote winnings”. The Assessing Officer assessed the income from booking as business and tote winnings as covered under section 56(2)(ib)​​ to be taxable at the then prevailing flat. It was decided by the Tribunal in Asst. CIT v. Raghunath B. Taware [2008] 302 ITR (AT) 136 (Pune) holding​​ that tote winnings are commonly perceived as part of the business of a punter. It is an integral part of the assessee’s business activity as a bookmaker with such bets made by him treated as hedge betting. The entire income is, therefore, assessable as normal business income.​​ 

Sale of land in parts is not adventure in nature of trade

The assessee had purchased​​ a large extent of land in 1970 and after getting clearance under the land ceiling law after considerable time, the assessee prepared a site plan and sold some plots in driblets. The issue whether the sale was of a stock-in-trade or capital assets came up in CIT v. Sohan Khan [2008] 304 ITR 194 (Raj). The Tribunal with reference to the test laid down by the Supreme Court in G. Venkataswami Naidu and Co. v. CIT [1959] 35 ITR 594 found that there was no evidence to show that the transaction could give rise to​​ business income or be treated as an adventure in the nature of trade in the absence of any evidence to show that the purchase had been made solely with the intention to resell at a profit. It was also found that there was no repetitiveness of purchases, since it was of a single purchase. But at the same time, it could not also be adventure in the nature of trade without establishing the intention to resell even at the time of purchase. It will be treated as capital gains.

Most significant consideration to conclude whether the transaction gave rise to capital gains or not would be the regularity of transactions of purchase and sale.​​ The mere fact that there was a series of transactions of sale only by selling part of the land, purchased in one go, or purchased once upon a time, piecemeal, would not render the activity of sale an “adventure in the nature of trade”. There was nothing to show that the land was purchased with the intention to sell it at a profit, or with requisite intention, to bring it within the parameters of “stock-in-trade”. It was also not shown that the assessee was a regular dealer in real estate. The transaction was of a capital asset only and not a transaction of any “stock-in-trade”. Therefore the sale proceeds were liable to be taxed as capital gains.

Income from letting/exploiting​​ commercial assets​​ 

If a commercial asset is not capable of being used as such, then its being let out to others does not result in an income which is the income of the business. But it cannot be said that an asset which was acquired and used for​​ the purpose of the business ceased to be a commercial asset as soon as it was temporarily put out of the use or let out to another person for use in his business or trade.​​ They yield of income by a commercial asset is the profit of the business irrespective of the​​ manner in which that asset is exploited by the owner of the business.​​ He is entitled to exploit it to his best advantage and he may do so either by using it himself personally or letting it out to somebody else - CEPT V/s. Shri Lakshmi Silk Mills Ltd. [1951] 20 ITR 451 (SC).

Can gifts be treated as business income?​​ 

The law would take care to treat gifts from employer as taxable perquisites in the hands of the employees under section 17 and from any one connected in business in the hands of businessmen under section 28 as deemed income. But in the case of a person where he is not carrying on business, the issue has to be decided as to whether activities of such a person would constitute a profession or at least a vocation, so that it could be treated as income in the course of business, profession or vocation. It is established law that the fact that it is received without any contractual obligation on the part of the giver itself would not save the recipient from tax.​​ 

It was held by the Supreme Court in P.​​ Krishna Menon v. CIT [1959] 35 ITR 48, that a retired police officer, who had taken to teaching Vedanta as a vocation, was taxable on voluntary contribution received by him following the principle in Herbert v. Mc Quade [1902] 2 KB 631, where it was pointed out that the test is from the stand point of the recipient as to whether he receives it by virtue of his occupation and not whether it is voluntary or otherwise in the hands of the giver.​​ A retired judge who takes up arbitration may well be liable on the receipt though it was not a matter of his livelihood, because it fell within the sphere of his activity as decided in K. Ramaswami Gounder v. CIT [1987] 163 ITR 94 (Mad).​​ In C. Rajagopalachariar v. CIT [1963] 50 ITR 196 (Mad), it was felt that even a person who writes not for money but for his conviction will be liable, since writing was his vocation.​​ While personal gifts are not taxable as was found in Parimisetti Seetharamamma v.CIT [1965] 57 ITR 532 (SC), if it arises by virtue of employment, it will be assessable as was found in C. Lakshmi Rajyam v. CIT [1960] 40 ITR 340 (Mad). It does not follow that a purse received from one's admirers would be taxable as was held in CIT v. S. A. Rajamanickam [1984] 149 ITR 85 (Mad). A similar view was taken in C. P.​​ Chitrarasu v. CIT [1986] 160 ITR 534 (Mad). Similarly, a purse received by a musician from his admirers was held not taxable in CIT v. M. Balamuralikrishna [1988] 171 ITR 447 (Mad) and by a doctor from a past patient in CIT v. Dr. B. M. Sundaravadanam [1984] 148 ITR 333 (Mad).​​ 

As for offerings received by a Mahant or religious heads, it may well be taxable as was held in Maharaj Shri Govindlalji Ranchhodlalji v. CIT [1958] 34 ITR 92 (Bom).​​ However, the main test is whether the recipient is engaged in some​​ service though not as a regular occupation, but even as a vocation.​​ 

But where it is not shown by the Revenue that he is exercising even a vocation as it happened in CIT v. Sri Vanamamalai Ramanuja Jeer Swamigal [1998] 231 ITR 632 (Mad), the offerings cannot be taxed. It was found that no evidence was produced before the Tribunal that the Swamigal was exercising any profession or vocation. The borderline in such cases is often thin. Such controversy probably would linger on, but would stand solved, and have new dimensions if the proposal in the Finance (No. 2) Bill, 1998, is passed by Parliament, because all gifts would then be treated as income in the hands of the recipient. Hence the proposal to make it donee-based would enlarge the scope of income-tax.​​