6.1 The main question before us for decision is whether the interest income could be treated as “business income” or “income from other sources”. The answer to this question has to depend on how the interest income derived by the assessee. No doubt, normally, on the placing of funds in banks on short-term or long-term deposits the interest income derived from those sources would be “income from other sources”. But it is not so easy to decide that interest income is always assessable under head “income from other sources”. It depends upon the facts of the each case. For appreciating facts of each case we would like to refer some of judgments which are as under
6.8 From above discussions we noticed that each case has got to be decided on the facts arising in that case because interest income can be a capital receipt; it can be “income from business” and “income from other sources”.. The different treatment of interest income is also to be given while considering deduction under chapter VI-A of the Act. Business profit in section 80HHC is different than normal business profit .Explanation (baa) to section 80HHC provides that profits of the business means the profits of the business as computed under the head “profits and gains of business or profession” as reduced by……. Thus for the purpose of calculation of deduction under section 80HHC, first it is to see whether interest is asses sable under the head “profits and gains of business or profession” or it is asses sable under the head ‘income from other sources’. Interest asses sable under the head “income from other sources”, is not at all relevant in calculation of deduction under section 80HHC. As stated above that, normally, on the placing of funds in banks on short-term or long-term deposits the interest income derived from those sources would be “income from other sources”, but there have been cases in which such income has been treated as “income from business”, notwithstanding the fact that it is interest income .if the deposit made by the assessee in the bank is capital employed, that would become part of the capital of the undertaking. Any income earned by the capital employed would automatically become the business income of the assessee and it cannot be treated as income earned from “other sources” .the investing of the moneys in term deposits was indisputably interconnected and are inextricably with the carrying on of the assessee’s business and that it is very difficult to see its activity as a separate and distinct activity. In the course of the assessee’s business, the assessee received money on several counts the earning of an interest which would reduce the cost of borrowing. This interest could be linked to the interest that the assessee charges from its customers on overdue payments, which would also be regarded as business income and never, treated as income from “other sources”.
6.9 On an analysis of section 56 of the Income-tax Act, 1961, which alone permits taxation of income from “other sources”, that the language used in that section also supports the view that the income earned by the assessee from business deposits could only be taxed as income from “business”, because the deposits sprang directly from the carrying on of the business and not de hors it and it was good management of cash to produce the income. It is obviously attributable and incidental to the business carried on by him. It would not be correct, to say that this interest is totally de hors the business carried on by the assessee. It is well settled that interest can be assessed under the head “Income from other sources” only if it cannot be brought within one or the other of the specific heads of charge. We find it difficult to comprehend that the interest receipts on capital employed by the assessee can be treated as receipts which flow to him de hors the business which is carried on by him. In our view, the interest payable to him certainly partakes of the same character as the receipts for the payment of which he was otherwise entitled under the business: It cannot be separated from the business receipts and treated as “income from other sources”.