2005 (8) TMI 45 - HC - Income Tax

1. Whether on the facts and in the circumstances of the case, the hon ble Member of the Income-tax Appellate Tribunal was justified in law in holding that the order of the Assessing Officer taxing the amount of interest and miscellaneous receipts, was erroneous and against law? 2. Whether on the facts and in the circumstances of the case, the hon ble Income-tax Appellate Tribunal was legally correct in holding that the amount of interest and miscellaneous receipts were not exigible to tax at the hands of the assessee company as income from other sources? - we answer the questions referred to us in the negative, i.e., in favour of the Revenue and against the assessee

Summary

Issues Involved:
1. Taxability of interest and miscellaneous receipts as income from other sources.
2. Legality of set-off of interest earned against interest payable on loans.

Issue-Wise Detailed Analysis:

1. Taxability of Interest and Miscellaneous Receipts as Income from Other Sources:

The primary issue was whether the interest and miscellaneous receipts earned by the assessee company, which was in the process of setting up a fertilizer plant and had not commenced manufacturing activities, should be taxed as income from other sources. The Assessing Officer had taxed these receipts, but the Commissioner of Income-tax (Appeals) set aside this order. The Tribunal upheld the Commissioner's decision, stating that these receipts should be considered for reducing the cost of the project rather than being taxed as income from other sources.

The Tribunal's decision was based on its earlier rulings for the assessment years 1986-87 and 1987-88, where it was held that such receipts were not exigible to tax as income from other sources. The Department, dissatisfied with this decision, sought a reference to the High Court.

The High Court, referencing the Supreme Court's judgment in Tuticorin Alkali Chemicals and Fertilizers Ltd. v. CIT, clarified that the interest earned on borrowed funds, even if kept temporarily in a bank, should be taxed as income from other sources. The Supreme Court had established that taxability arises at the point of accrual and is not dependent on the destination or manner of utilization of the income. The High Court noted that the financial institutions' stipulation that interest earned would reduce the loan liability did not create a legal obligation diverting the income at source.

2. Legality of Set-off of Interest Earned Against Interest Payable on Loans:

The second issue involved whether the interest earned by the assessee could be set off against the interest payable on the loans taken for the project. The High Court, following the Supreme Court's ruling in Tuticorin Alkali Chemicals and Fertilizers Ltd., held that such an adjustment is not permissible unless explicitly allowed by the Income-tax Act. The Supreme Court had explained that while the company might capitalize the interest payable, it could not adjust this expenditure against the interest earned, as the business had not commenced, and the expenditure was not deductible under section 57 of the Act.

The High Court further referenced its own earlier rulings and other Supreme Court judgments, including CIT v. Coromandal Cements Ltd., CIT v. Bokaro Steel Ltd., and CIT v. Autokast Ltd., which reinforced the principle that income earned from surplus funds is taxable as income from other sources, irrespective of the source of the funds.

Conclusion:

The High Court concluded that the interest and miscellaneous receipts were indeed taxable as income from other sources and could not be set off against the interest payable on loans. The questions referred were answered in the negative, favoring the Revenue and against the assessee, with no order as to costs.