1981 (6) TMI 68 - AT - Income Tax

Summary

Issues Involved:
1. Treatment of interest income and miscellaneous receipts during the construction period.
2. Applicability of section 57 of the Income-tax Act, 1961.
3. Capitalization of interest payments and receipts.

Summary:

Issue 1: Treatment of Interest Income and Miscellaneous Receipts During the Construction Period
The assessee, a company incorporated on 29-7-1974, was still in the construction stage during the assessment year 1977-78. The balance sheet as of 30-6-1976 showed unadjusted miscellaneous expenditure of Rs. 29,93,636. The assessee claimed that interest income received during this period should be treated as part of business income and set off against the construction expenses. The ITO and Commissioner (Appeals) treated the interest income as assessable u/s 56 as "Income from other sources" and allowed only a partial deduction of Rs. 4,000 for related expenses.

Issue 2: Applicability of Section 57 of the Income-tax Act, 1961
The ITO and Commissioner (Appeals) held that the interest receipts and other income had to be taxed separately since the expenditure incurred was for construction purposes and not for earning income assessable under "Income from other sources." They concluded that no expenditure could be allowed as a deduction u/s 57, and the entire receipts of Rs. 19,990 were assessable.

Issue 3: Capitalization of Interest Payments and Receipts
The Tribunal considered previous conflicting decisions and the principles laid down by the Supreme Court in Challapalli Sugars Ltd. v. CIT [1975] 98 ITR 167, which allowed interest paid before the commencement of production to be capitalized. The Tribunal found a direct nexus between the borrowed funds and the deposited funds, concluding that interest receipts should reduce the interest payments. Thus, the net interest outgoing of Rs. 7,79,297 should be considered for capitalization, and the interest receipt of Rs. 15,092 should not be separately taxed.

Conclusion:
The Tribunal directed the exclusion of the entire amount of Rs. 19,900 from taxation, holding that the interest income and miscellaneous receipts should offset the capital expenditure. The appeal was allowed, and the principles laid down by the Institute of Chartered Accountants of India were duly considered. The judgments of the Madras High Court in Madras Fertilizers Ltd. and the Calcutta High Court in New Central Jute Mills Co. Ltd. were found inapplicable to the facts of this case.