1993 (7) TMI 251 - HC - Income Tax

Income - Assessable as - Assessment year 1972-73 - Whether interest earned on short-term deposits representing surplus money received on account of over-subscription of company s shares is income taxable under the Act - Held, yes, Income from other sources - Assessable as - Assessment year 1972-73 - Whether interest earned on short-term deposits representing surplus money received on account of over-subscription of company s shares is assessable as Income from other sources - Held, yes - Whether interest paid on amounts borrowed by assessee for construction of superstructure, before commencement of production, could be adjusted against aforesaid receipt of interest - Held, no

Issues Involved:
1. Whether the Tribunal was justified in law in deleting Rs. 3,13,014 for the assessment year 1972-73 as income from other sources on account of interest.
2. Whether interest earned, taxable as income from other sources, is subject to deduction towards the construction of the factory.

Detailed Analysis:

Issue 1: Justification of Deleting Rs. 3,13,014 as Income from Other Sources
The Tribunal had found that the assessee had not commenced any business during the period under consideration and was still in the midst of constructing and completing structures. The assessee earned Rs. 3,18,014 as interest from short-term bank deposits and deposits with steel suppliers. The Tribunal estimated the necessary expenditure for earning this interest income at Rs. 50,000 and noted that the interest received had been appropriated against the cost of construction. The Tribunal concluded that the interest income should not be subjected to income tax, considering its application and adjustment towards construction costs.

However, the High Court found that the Tribunal's approach was more aligned with accounting and commercial practices rather than legal principles under the Income-tax Act. The Court emphasized that under Section 4 of the Act, tax is levied on the total income of the previous year, and income is defined inclusively under Section 2(24). The Court held that the bank interest received qualifies as "income from other sources" under Section 56, as it does not fall under any other specified head of income. Thus, the interest income is taxable, and the Tribunal's deletion of Rs. 3,13,014 was not justified.

Issue 2: Deduction of Interest Earned Towards Construction Costs
The assessee argued that the interest earned during the construction period should be set off against the expenses incurred during the same period, as guided by the Institute of Chartered Accountants of India's brochure. The Tribunal had allowed a deduction of Rs. 50,000 for expenses essential for earning the interest income.

The High Court, however, clarified that under Section 57(iii) of the Act, deductions from income chargeable under "Income from other sources" are allowed only if the expenditures are not capital in nature and are incurred wholly and exclusively for earning such income. The Court found that the interest paid on borrowings for construction did not meet these criteria, as it was not paid wholly and exclusively for earning the bank interest. Additionally, the Court noted that the application of income towards construction does not exempt it from tax under the Act, as there is no provision in the Act that exempts income from being taxable if applied to capital assets.

The Court also rejected the reliance on the Institute of Chartered Accountants' brochure, stating that the principles of commercial accounting cannot determine taxable income under the Act. The Court referred to the Supreme Court's decision in Challapalli Sugars Ltd. v. CIT, which held that interest paid on borrowings for asset acquisition before production commencement is capital expenditure and not deductible.

Conclusion:
Both questions were answered in the negative, against the assessee and in favor of the Department. The interest income earned by the assessee was deemed taxable, and no deductions were allowable under Section 57(iii) for expenses related to construction. The Tribunal's decision to delete Rs. 3,13,014 as income from other sources was not justified under the provisions of the Income-tax Act.

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