1995 (3) TMI 46 - HC - Income Tax

Summary

Issues Involved:
1. Taxability of interest received on short-term deposits u/s 56 of the Income-tax Act, 1961.
2. Adjustment of interest received on short-term deposits against interest payments while capitalizing expenditure to capital account.

Summary:

Issue 1: Taxability of Interest Received on Short-term Deposits u/s 56 of the Income-tax Act, 1961

The court examined whether the interest received of Rs. 2,58,089 on short-term deposits with banks was taxable under section 56 of the Income-tax Act, 1961. The Income-tax Officer held that the interest income earned by the assessee on deposits with the bank is taxable as "income from other sources" u/s 56, as it has no connection with the construction activities of the company. This view was supported by various precedents, including CIT v. Modi Rubber Ltd. [1994] 208 ITR 379 and CIT v. Bihar Alloy Steels Ltd. [1994] 206 ITR 350, which held that interest from bank deposits arises from an independent source and is assessable as "income from other sources."

Issue 2: Adjustment of Interest Received on Short-term Deposits Against Interest Payments While Capitalizing Expenditure to Capital Account

The court also considered whether the interest received on short-term deposits should be reduced from the interest payments while capitalizing the various expenditures to the capital account. The Income-tax Officer and subsequent appellate authorities rejected the assessee's contention that the interest received should be adjusted against the interest paid. The court noted that section 57 of the Act permits deductions only for expenditures incurred to earn the interest income, and there is no provision allowing the interest earned on short-term deposits to be adjusted against interest paid on borrowed capital for construction. This position was reinforced by decisions such as CIT v. Seshasayee Paper and Boards Ltd. [1985] 156 ITR 542 and CIT v. United Wire Ropes Ltd. [1980] 121 ITR 762.

Conclusion:

The court concluded that:
1. The interest received on short-term deposits is assessable as "income from other sources" u/s 56.
2. There is no provision under section 57 for claiming the deduction of interest paid on borrowed capital for the establishment of the factory.
3. The actual cost for depreciation includes the gross payment of interest, not the net payment after adjusting any interest received on short-term deposits.
4. The income received on short-term deposits cannot be adjusted against the interest paid on borrowed capital for capital expenditure.
5. The assessee was not carrying on business during the relevant assessment year, and thus, the income from short-term deposits is not from "business" but from "other sources."

The reference was answered in favor of the Revenue and against the assessee, with no order as to costs.