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Issues:
1. Taxability of interest received from contractors on loans advanced by the assessee as a capital receipt reducing the cost of the plant. Analysis: The case involved a question referred to the Kerala High Court by the Tribunal regarding the taxability of interest received by the assessee from contractors on loans advanced to them. The assessee, engaged in constructing a Shipyard, provided funds to contractors for work, charging interest amounting to Rs. 26,90,680 during the relevant assessment year. The assessee claimed the interest as part of the capital cost, thus not liable to tax. The Assessing Officer taxed the amount, but the Commissioner (Appeals) and the Tribunal ruled in favor of the assessee, stating that the interest amount was not taxable as it was subsequently recovered from the contract amount. The revenue contended that income-tax is attracted when income is earned, irrespective of its utilization, and thus, the interest was taxable. Conversely, the assessee argued that since no amount reached their hands as income, the interest was not taxable. The Court emphasized that income-tax liability is determined at the point of income accrual, based on whether the amount is of a revenue nature. Interest income is generally revenue unless received as damages or compensation. Utilizing borrowed money to earn interest generates income, which remains taxable even if used to repay the loan interest. The Court highlighted that accounting practices cannot override tax laws and clarified that income from borrowed capital used for earning income is taxable under the Income-tax Act. The Court referenced Section 14 of the Act, emphasizing that income must be classified under different heads for computation. It explained that even if a company has not commenced business, income from other sources like interest on surplus funds is taxable under Section 56. The Court concluded that interest received by the company from investments, even if earned by utilizing borrowed capital, is taxable income. Any set-off or deduction should comply with the Act's provisions. Citing the Tuticorin Alkali Chemicals case, the Court ruled in favor of the revenue, stating that interest earned by the company using borrowed funds is taxable income, not a capital receipt. Thus, the question was answered in the negative, favoring the revenue and against the assessee. In conclusion, the Court held that the interest received by the assessee from contractors on loans advanced to them was taxable income, not a capital receipt reducing the cost of the plant, as claimed by the assessee. The reference was disposed of accordingly.
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