1991 (6) TMI 12 - HC - Income Tax

Summary

Issues Involved:
1. Taxability of interest received from bank deposits during the pre-production period.
2. Applicability of accountancy principles and their impact on tax treatment.
3. Nexus between interest received and interest paid for capitalisation purposes.

Summary:

1. Taxability of Interest Received from Bank Deposits:
The primary issue was whether the sum of Rs. 18,913, being interest received by the assessee-company from bank deposits, could be brought to tax for the assessment year 1977-78. The respondent-company, which had not yet gone into production, argued that this interest should not be treated as income but should be deducted from the interest paid on term loans, thereby reducing the capital cost of the project. The Income-tax Officer, however, held that the interest received is not a capital receipt and is liable for taxation under the head "Income from other sources." The Tribunal annulled the assessment, but the High Court disagreed, stating that the amount of Rs. 18,913 has been rightly treated as income from other sources u/s 56 of the Act.

2. Applicability of Accountancy Principles:
The Tribunal's conclusion was based on the accountancy principle enunciated in the booklet "Study on Expenditure during Construction Period" by the Institute of Chartered Accountants of India. The Tribunal relied on the principle that interest income earned during the construction period may be offset against interest expenses incurred during this period. However, the High Court noted that this principle should not be read in isolation and must be understood in the context of related items of expenditure. The court emphasized that the principle of nexus must be applied, meaning there should be a direct correlation between the item of receipt and the item of expenditure.

3. Nexus Between Interest Received and Interest Paid:
The High Court observed that the interest received from share capital money deposited with the bank could not be set off against the interest paid on term loans used for construction and setting up of the plant. The court held that the source of money which has given rise to interest liability and interest receipt is relevant, and there must be a nexus between the two transactions. The court concluded that the interest received on share capital money does not stand on the same footing as the interest incurred during the pre-production period and cannot be set off against each other.

Conclusion:
The High Court held that the sum of Rs. 18,913 being interest received by the assessee-company from bank deposits could be brought to tax for the assessment year 1977-78. The Income-tax Appellate Tribunal was not justified in annulling the assessment. The question was answered in favor of the Revenue and against the assessee.