R.L. SANGANI, J.M. ORDER This appeal by Department is directed against order dt. 12th Oct., 19 81 passed by CIT (A) VII, Bombay. 2. assessee is private limited company. assessment year is 19 78-79. previous year ended on 31st March, 19 78. 3 . At relevant time assessee was engaged in construction of there buildings. Under methods of accounting followed by assessee and accepted by Department, profits were offered for assessment when construction of buildings and sale of flats comprised therein were completed. In relevant accounting year, construction of buildings and sale of flats had not been completed. consequently all expenses incurred during year were carried forward to next year. 4. On scrutiny of P & L A/c, ITO found that assessee had credited, inter alia, following five amounts in relevant accounting year: Interest on sale (i) Rs. 20,000 deposits Interest on temporary (ii) loans from surplus . 14,686 funds Interest of Fixed (iii) . 1,200 Deposits (iv) Other interest . 2,877 Profit on sale of (v) . 6,66,000 property . . . 7,04,763 5. ITO was of opinion that said amounts represented income which had no relationship with business of construction of buildings and sale thereof. Accord to him, those items related to income arising from source other than business of construction carried on by assessee. That income was, therefore, not liable to computed along with business income of construction of buildings which income was offered no completion of construction. He, therefore, with approval of IAC, assessed said income as income from other sources for relevant year. He did not accept explanation given by assessee in letter dt. 6th March, 19 81. 6. CIT (A) before whom assessee went in appeal relied on his own earlier order for asst. yrs. 19 74-75 and 19 75-76, wherein it had been held that earning of interest by assessee was "the fruit of its business activity of construction of buildings and selling same". He further held that interest was trading receipt and could not be said to have arisen from other activity. Consequently taxation thereof as income from other sources was not warranted either on principles of accountancy or other provisions of law. Following said decision of his own, CIT (A) allowed appeal and directed ITO to consider these items as business receipts of assessee while computing business income in respect of completed projects in accordance with system stated to have been regularly followed. 7. Department has now come in appeal before us and only ground raised is that CIT (A) had erred in holding that said amount of Rs. 7,04,763 was to be treated as income from business and not income from other sources. 8. It may be mentioned at outset that term "interest" has been used in respect of first four items while term "profit on sale of property" is used in respect of fifth four items viz. (i) interest on sale deposits (ii) interest on temporary loans (iii) interest on fixed deposits and (iv) other interest. 9 . facts found and not in controversy are as follows. assessee received deposits in instalments from prospective purchasers while work of construction was in progress. deposits had to be made by certain dates by prospective purchasers, under agreements executed by them. If they failed to make deposits by stipulated dates, they had to pay interest for period of default. first item relates to interest of this nature received by assessee. 10. authorised capital of assessee was small. But amounts received as deposits were large. All amounts were not required by assessee to meet cost of construction at one and same time. Hence l r g e portion of these deposits remained idle. assessee, therefore, deposited them in current account or gave temporary loans so that amounts could be received back at time when they were needed to meet cost of construction. In process, assessee earned interest. interest of items No. (ii) and (iv) came under that category. 11. assessee constructed buildings on land which had been taken on lease from State Government. assessee had to give certain guarantee to State Government. For that purpose assessee had to keep certain amounts in fixed deposits. These fixed deposits in process gave rise to income by way of interest. interest in item No. (iii) above comes under this category. 12. question is whether interest income which was generated in above process should be treated as business income as contended on behalf of assessee and held by CIT (A) or it should be treated as income from other sources as held by ITO. If it is held to be business income arising in course of business of assessee of construction of buildings, it would reduce cost of project and would enter into computation at time of completion of project. If it is held as income unconnected with business of construction of buildings it would not be business income and would be liable to assessed as income from other sources in year in which it accrued and not in year in which project was completed. So controversy centres on this narrow point 13. It is well settled that heads of income under s. 14 of Act are mutually exclusive and that income falling under each one of them should be computed under that head only. Certain decision were cited by parties on this point but proposition is so well established that it is not necessary to notice them. It is also clear from s. 56 of Act that income which is otherwise includible would come under head "income from other sources" only if that income is not chargeable to income-tax under any of heads specified in s. 14 items to E. It follows that interest income in present case would fall under head "income from other sources" only if that income does not fall under head D profits and gains of business or profession and not otherwise. 1 4 . Now, business with which we are concerned in this case is business of construction of building and sale of these flats after completion of construction. Large deposits came in hands of assessee in course of this business from prospective purchasers. These large amounts were not immediately needed by assessee to meet cost of construction. They were needed at particulars intervals. During intervening periods funds remained idle. Hence they had to be deposited in Bank or given as loans in such manner that funds remind at back and call. This was that was done by assessee. Similarly, assessee received interest from prospective purchasers who were late in making deposits. interest was received in pursuance of very agreements made with these purchasers. Some amounts had to be kept in fixed deposit in pursuance of requirement of lease of land on which construction was made. 15. Thus all this interest income sprang from business activity of assessee. It did not arise out of any independent activity, i.e., activity wholly unconnected with business of construction. interest had direct nexus with business activity. interest received was virtually trading receipt and interest paid was trading layout. In these circumstances, there can be no doubt that interest income was business income of assessee. 16. It is to be noted that interest income has not arisen out of idle capital of assessee. It has arisen out of deposits received in course of business. This aspect is important and cannot be over looked. 17. It can hardly gain said that profits and gains of business have to be arrived at not merely by considering profits derived by assessee on sale of its stock-in-trade but also profits earned by it as integral part of its business activities and embedded in various kinds of trading receipts which are ancillary of incidental of such business. Thus is was held in Jodhamal vs. CIT ( 19 72) 83 ITR 464 (P&H) that interest which company receives in respect of refund of tax would be its business income. 18. On same principle it was laid down in CIT vs. Favre Leuba & Co. Ltd. ( 19 79) 1 Taxman 4 19 (Bom) that where sole selling agent makes advances to its principal and earns interest therefrom, interest would be assessable as business income where advance are made in course of business and with view of assist principal in its manufacturing activity particularly where advances are made not out of idle funds but out of deposits received by it from its sub-distributors or out of overdrafts taken by it from banks. 1 9 . Reliance was placed by Department on decision in CIT vs. Industrial Solvents and Chemical (P) Ltd. ( 19 79) 8 CTR (Bom) 124 : ( 19 79) 1 19 ITR 608 (Bom). principle laid down therein is that business can be said to have been set up when reasonable quantity of end product is obtained. Expenses preparatory to commencement of business was not allowable. On basis of this decision, it was argued that since interest income had arisen prior to completion of construction it was income derived prior to commencement of business and as such said income cannot be treated as business income. There is obvious fallacy in argument. business of construction of flats and sale thereof commence with entering into agreement with prospective purchasers after acquisition of land. It does not commence only after completion of construction. hence income derived subsequent to agreement with prospective purchasers would be income of business and would not be pre-business receipts. 20. Considering all circumstances we hold that interest income falling under items (i) to (iv) was income of business of assessee and was liable to be considered at time of completion of project along with other income. It was not income from other sources liable to be assessed in assessment year with which we are concerned. directions given by CIT (A) so far as they pertain to these four items are upheld. 2 1 . We shall now deal with fifth item of Rs. 6,66,000. This amount represents, what has been described by assessee as "profit on sale of property". contention of assessee is that this amount in substance is interest earned on deposits while contention of Department is that said amount falls under different category. We shall fist analyse transaction from which above sum has been received. 22. As already stated assessee had large amount at its disposal on account of deposits received from intending purchasers. Out of that amount assessee paid Rs. 50,00,000 to Haribhai Estates (P) Ltd. on 4th Jan., 19 77. said company is under same management as assessee-company. said payment was made in pursuance of agreement 4th Jan., 19 77. Under said agreement assessee agreed to purchase from said company certain portions of building viz., 8th, 9th and 10th floors of Maker Towers E admeasuring 44,400 sq. ft. said building was under construction at that time. price was fixed at Rs. 66,60,000 and Rs. 50 lacs were accepted as part of said price by way of earnest money. It was specifically mentioned in agreement that balance of Rs. 16,60,000 would be paid by assessee to said company at time of delivery of possession. 23. On same day, i.e., on 4th Jan., 19 77 said company wrote letter to assessee in which terms of said agreement were confirmed. Thereafter two further terms were mentioned. first was that if said company paid Rs. 50,00,000 to assessee by 30th July, 19 77, said agreement of sale would stand terminated and that at time of termination said company would pay Rs. 6,60,000 to assessee "as and by way of compensation on repurchase of said offices" and thereafter right, title and interest of assessee would come to end. second was that in case said company failed to make said payment, assessee would have right without making balance payment of Rs. 16,60,000 to enter upon aforesaid premises if completed or if incomplete assessee would be come absolute owners of said premises as period of condition of repurchase would be over. 24. said company repaid to assessee Rs. 50,00,000 on 30th July, 19 77 along with sum of Rs. 6,60,000 "as and by way of compensation on repurchase of said offices". It is this amount of Rs. 6,60,000 regarding which controversy is before us. 25. contention of assessee is that said amount of Rs. 6,60,000 had been earned by assessee on sum of Rs. 50,00,000 which had been received as deposits and as such said amount represents it income in business of construction of buildings. Consequently said amount should be assessed as part of business income at time of final assessment on completion of project. said amount would reduce overall cost of project. contention on behalf of Department is that activity of purchase and sale of office premises in Maker Tower E under agreement dt. 4th Jan., 19 77 was activity distinct from that of construction of building by assessee. Consequently any profit earned from former activity would not be part of profits of business of construction of buildings carried on by assessee and said profits would be liable to be assessed separately in year in which they arose. 26. We have considered rival submissions and facts on record. We are unable to accept contention that income of Rs. 6,60,000 which had arisen under said agreement dt. 4th Jan., 19 77 was by any of interest. If assessee intended to land Rs. 50 lacs to said company on interest nothing prevented parties from drawing up agreement of loan. It is said that simple agreement of loan was not drawn up because that might have resulted in breach of certain obligations under provisions of Companies Act. It is not necessary for us to consider that aspect. If act cannot be done directly, it cannot be done indirectly. Besides Rs. 6,66,000 could not be interest on Rs. 50 lacs for period of less than seven months at normal rates of interest. 27. In CIT vs. B. M. Kharwar ( 19 69) 72 ITR 603 (SC) it has been laid down by Supreme Court that taxing authorities are not entitled to ignore legal character of transaction which is source of receipt and proceed on what they regard as "substance of matter". Similarly, it is not open to assessee to contend that term of agreement were not same as were incorporated in document and that in substance agreement was different from what was incorporate in document particularly nothing prevented parties to incorporate terms according to their so called real intention. 28. In present case documents indicate that relationship that was created between said company and assessee was that vendor and intending purchaser. It is true that company had option to return amount by 30th July, 19 77 along with compensation and terminate agreement but there was no corresponding right in assessee to terminate same and demand amount. What all assessee could insist, failure of company to repay amount, was delivery of possession of premises and call upon company to convey title. This was, therefore, not case of loan to company. It was transaction of purchase of certain premises coupled with liability to terminate agreement if amount was refunded with compensation. transaction was one of purchase and sale of premises from others and obviously this was not part of business of assessee which was to construct buildings and sell flats comprised therein. 29. It is profits and loss of business of construction of buildings which are to be assessed on completion of project. Any gains accruing to assessee from activity unconnected with said business are not to be computed along with said profits and loss of business. Such gains would arise from different source viz., that of agreement to purchase certain immovable property and they would be liable to be assessed separately in year in which they arise. 30. interest income which has been discussed in beginning is of different character from income by way of different character from income by way of compensation with which we are at present dealing. It is true that amounts which gave rise to both these incomes spring from same source viz., deposits received by assessee from intending purchasers of flats under constructions. However, activity which gave rise to these incomes are different. In first case, funds not required were temporarily lent on interest of deposited in banks. Thus amounts were at back and call and there was mere temporary use of funds which resulted in interest income. In other case funds have been diverted for investment in purchase of immovable property and under terms, there was no option but to purchase if vendor was unable to pay. There was no right to get back amount itself. Thus it was altogether different activity. 31. Supposing funds had been invested in purchase of shares. Any income received by way of dividend would have been income from other sources and gains arising from sale of shares would have attracted provisions regarding capital gains. Such gains would not have been business income. similar would b e case when funds have been invested in purchase of immovable property. 3 2 . On behalf of assessee reliance is placed on decisions of Tribunal in Arasan Aluminium Industries (P) Ltd. vs. First ITO ( 19 82) 1 ITD 10 (Mad) (SB) and in Nagarjuna Steels vs. ITO ( 19 83) 3 ITD 796 (Hyd) (SB). These decisions lay down that interest income during construction was business income. We have already held so in respect of interest income. decisions do not deal with question with which we are concerned at present. We have already pointed out that interest income is different in nature from income by way o f compensation on purchase of property. Another decision of Tribunal on which reliance was placed is in assessee own case for asst. yr. 19 74-75 (ITA No. 602/Bom/ 19 81) dt. 7th June, 19 82. That order deals with question whether reopening of assessment under s. 147 was justified. It does no deal with merits of question with which we are at present concerned. 33. ratio of decisions of Supreme Court in CIT vs. Laxmi Silk Mills Ltd. ( 19 51) 20 ITR 451 (SC), Karmani Properties Ltd. vs. CIT 19 73 CTR (SC) 470 : ( 19 71) 82 ITR 54 (SC), Pandit Narain Dutt vs. CIT ( 19 72) 83 ITR 413 (SC), S. G. Merchantile Corporation Ltd. vs. CIT 19 72 CTR (SC) 8 : ( 19 72) 83 ITR 700 (SC) and Chowranghee Sales Bureau (P) Ltd. vs. CIT 19 73 CTR (SC) 44 : ( 19 73) 87 ITR 542 (SC) on which assessee relied is that income from exploitation of commercial assets would be business income whether exploitation is done directly or through some other agency. What is important in such cases is to can closely facts and circumstances of case and examine intention and object of assessee in giving on lease commercial assets. If intention is to exploit commercial assets at some point of time and lease is only temporary phase forced on him by financial or other limitations, income in hands of assessee would be business income. On other hand, if intention is to derive income on basis of ownership and lease of assets, income would be assessable under s. 56. 3 4 . In present case as already stated, was no option for assessee to call upon company to repay amount of Rs. 50 lacs. It was only option of company to repay. If company did not repay, assessee had no option but to make purchase absolute. Thus it cannot be said that amount was given as loan. transaction was that of purchase of immovable property and gains arising thereof would be income from other sources. 35. We, therefore, hold that amount of Rs. 6,66,000 under head "profit on sale of property" does not form part of income of business of construction of buildings and sale of flats comprised therein and as such said amount was liable to assessed as income from other sources in relevant assessment year and assessee would be entitled to only such deductions as are permissible under Act for computation of income from other sources. We, therefore, set aside order of CIT (A) in respect of this item and direct ITO to assess said amount in accordance with law. 36. In result, appeal is partly allowed. *** INCOME TAX OFFICER v. PARAMOUNT PREMISES (P) LTD.