Tuticorin Alkali Chemicals v CIT

Facts

• Tuticorin Alkali raised capital (share capital and borrowings) to establish a fertilizer plant
• During the construction/pre-commencement period, surplus funds were deposited in banks on short-term deposits
• The deposits earned substantial interest income
• The assessee claimed the interest was business income (inextricably linked to business activity)
• The CIT treated it as Income from Other Sources under S.56

Issues

1. Whether interest on deposits during pre-commencement period is business income or income from other sources
2. Whether the source of the deposited funds (business borrowings) determines the head of income

Held

• Business had not commenced; the company was in the setting-up stage
• Interest earned during pre-commencement cannot be business income because there is no business yet in operation
• The character of income is determined by the nature of the activity generating it (deposit with bank) not the source of funds
• The interest is Income from Other Sources (S.56)
• The funds being earmarked for business does not change the character of the interest earned before business begins

Ratio Decidendi

Income follows the activity that produces it, not the intention behind the deployment of capital. Until a business commences, there is no "business" to generate "business income." Interest from bank deposits is the return on a depositor-bank relationship, not a business activity. The purpose for which funds are ultimately intended does not retrospectively colour the character of interim interest.