1994 (3) TMI 70 - HC - Income Tax

Summary

Issues Involved:
1. Taxability of interest income on investment of share capital before business commencement.
2. Deductibility of expenses against interest income during the pre-operational period.
3. Classification of interest income as "Income from other sources" or business income.

Summary:

1. Taxability of Interest Income on Investment of Share Capital Before Business Commencement:
The key issue was whether the interest income on investment of share capital earned by the assessee before the commencement of its business could be taxed. The Tribunal held that such interest income could not be brought to tax in the hands of the assessee-company because it had not started its business. The Tribunal relied on the decision in Arasan Aluminium Industries (P.) Ltd. v. First ITO [1982] 1 ITD 10 (Mad), where it was observed that interest earned during the construction period should go to reduce the capital cost, following the principles laid down by the Supreme Court in Challapalli Sugars Ltd. v. CIT [1975] 98 ITR 167.

2. Deductibility of Expenses Against Interest Income During the Pre-Operational Period:
The Commissioner of Income-tax (Appeals) accepted the assessee's claim to set off certain expenses against the interest income, resulting in a nil income computation. The Tribunal agreed, noting that the interest earned was not from long-term investments but from short-term deposits made while awaiting use in the capital project. The Tribunal emphasized that the receipts and payments before the business was fully set up would be on capital account, and it would be inconsistent to treat the receipts as revenue in nature while treating the expenditures as capital.

3. Classification of Interest Income as "Income from Other Sources" or Business Income:
The High Court examined various decisions, including CIT v. Indian Drugs and Pharmaceuticals Ltd. [1983] 141 ITR 134 (Delhi), which held that interest income from surplus funds invested before the commencement of business is assessable under the head "Income from other sources." The Court distinguished this from cases where the interest was earned on borrowed capital, which could be capitalized as part of the project cost. The Court held that the interest income from the share capital invested in fixed deposits, while the business had not commenced, was not related to the construction activity and thus was assessable as "Income from other sources."

Conclusion:
The High Court concluded that the interest income earned by the assessee on the investment of share capital before the commencement of its business was assessable as "Income from other sources." The Court answered the question in the negative, in favor of the Revenue and against the assessee.