1982 (1) TMI 72 - AT - Income Tax

Summary

Issues:
1. Whether the interest income earned by the assessee is taxable.
2. Whether the expenditure incurred by the assessee can be set off against the interest income.
3. Whether the interest income can be adjusted against capital expenditure for erecting the factory.
4. Whether the expenditure incurred by the assessee is allowable under section 37 or section 57(iii) of the Income-tax Act, 1961.

Analysis:
The judgment pertains to an appeal by an assessee against the decision of the Commissioner (Appeals) regarding the taxability of interest income earned. The assessee-company received excess share application money, which was deposited in fixed deposits, resulting in interest income. The Income Tax Officer (ITO) taxed the balance of the interest income after allowing a reasonable amount of expenditure. The Commissioner (Appeals) upheld the taxability of the interest income and dismissed the appeal, emphasizing that the interest received cannot be adjusted against capital expenditure. The assessee contended that the expenditure was related to raising share capital and should be set off against the income.

The assessee argued that the expenditure incurred was for the business purposes and should be allowed under section 37 of the Act. Additionally, the assessee sought to set off the interest income against the capital expenditure for erecting the factory. The departmental representative contended that the interest income fell under "Income from other sources" as the business had not commenced, and the expenditure did not directly relate to earning the income. The representative cited the Gujarat High Court decision in Padmavati Jaikrishna to support the argument that there must be a direct nexus between expenditure and income.

The tribunal held that the interest income was taxable as the business had not commenced, and the expenditure did not directly contribute to earning the income. The tribunal agreed with the Commissioner (Appeals) that revenue receipts and capital expenditure are distinct, and the taxability of income cannot be altered by capitalizing a smaller amount for capital expenditure. Ultimately, the appeal by the assessee was dismissed, affirming the taxability of the interest income and the disallowance of setting it off against capital expenditure.