1993 (4) TMI 107 - AT - Income Tax

Earned Income Expenditure Incurred Income From Other Sources Interest Income Set Off Short-term Deposits

Summary

Issues Involved:
1. Taxability of interest earned on surplus funds.
2. Classification of interest income as "income from other sources."
3. Adjustment of interest income against project cost.
4. Applicability of accountancy principles and guidelines.
5. Relevance of judicial precedents and case laws.

Issue-wise Detailed Analysis:

1. Taxability of Interest Earned on Surplus Funds:
The primary issue is whether the interest earned on surplus funds deposited in short-term schemes should be considered taxable income. The Assessing Officer treated the interest of Rs. 22,99,975 as "income from other sources," arguing that since the company's business had not commenced, the interest income should be capitalized along with other pre-operation expenses. The CIT (Appeals) disagreed, following the Delhi High Court's decision in Snam Progetti S.P.A. v. Addl. CIT, and held that the interest earned should reduce the project cost and not be treated as taxable income under "other sources."

2. Classification of Interest Income as "Income from Other Sources":
The revenue argued that since the business activity of the assessee had not started, the interest income from surplus funds should be classified as "income from other sources." They relied on several judicial precedents, including the Delhi High Court's decision in Indian Drugs & Pharmaceuticals Ltd. and the Special Bench decision of the Tribunal in National Thermal Power v. IAC. The Tribunal, however, noted that the interest income should be set off against the interest expenses incurred during the construction period, as per the guidelines issued by the Institute of Chartered Accountants.

3. Adjustment of Interest Income Against Project Cost:
The assessee contended that the interest earned should be adjusted against the project cost, citing the incidental nature of the income during the construction period. The Tribunal agreed, emphasizing that the interest income earned during the construction period should be offset against the interest expenses incurred. This view was supported by the Supreme Court's decision in Challapalli Sugars Ltd. v. CIT and India Cements Ltd. v. CIT, which allowed for such adjustments.

4. Applicability of Accountancy Principles and Guidelines:
The Tribunal referred to the guidelines issued by the Institute of Chartered Accountants, which suggest that miscellaneous income directly related to a particular item of expenditure should be set off against that expenditure. This principle was also supported by the accountancy guidelines, which recommend offsetting interest income earned during the construction period against interest expenses incurred during the same period.

5. Relevance of Judicial Precedents and Case Laws:
The Tribunal considered various judicial precedents, including decisions from the Calcutta High Court in Karanpura Development Co. Ltd. v. CIT, the Andhra Pradesh High Court in Nagarjuna Steels Ltd., and the Supreme Court in India Cements Ltd. These cases supported the view that income earned from surplus funds should be treated as business income and offset against related expenses. The Tribunal distinguished the present case from the Special Bench decision in National Thermal Power, noting that the facts were different, particularly regarding the source of funds and the stage of business operations.

Conclusion:
The Tribunal concluded that the CIT (Appeals) was correct in excluding the interest income from taxable income and adjusting it against the project cost. The appeal by the revenue was dismissed, affirming that the interest income earned during the construction period should be set off against the interest expenses incurred, in line with established legal principles and accountancy guidelines.