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TMI Blog2002 (9) TMI 288X X X X Extracts X X X X X X X X Extracts X X X X ..... estments made of idle funds which were received from Government and World Food project as loan/fund for execution of certain projects which had long gestation periods. The interest liability was capitalized to the project account and while doing so, the interest receipts were set off against the interest payable and the net interest alone was capitalized. The interest liability was much more than the interest the assessee earned by making investment of idle funds and, therefore, the net interest liability alone was capitalized. This according to the assessee was in keeping with sound accounting principles and as a prudent businessman to reflect the real financial projection the net interest was rightly debited to the project cost account. According to the assessee by investing the idle funds and earning interest, the assessee reduced its interest liability which was payable on these loans/funds to the Government and World Food Project, respectively. 3. We shall first deal with the interest income of Rs. 99,20,138 received by the assessee shown in the P&L a/c. During the previous year relevant to asst. yr. 1996-97, the assessee received a sum of Rs. 99,20,138 as interest income. Th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ll now deal with the interest income of Rs. 66,51,224 which was not shown as income in the P&L a/c. In the annual report and accounts of the assessee for the financial year 1995-96 in Note B-6, Sch. 20 (dealing with accounting policies & financial notes) to the audited accounts the auditors have pointed out as follows: The interest earned out of the unutilized funds specifically received from the Government/World Food Project for the following activities is credited to the respective activity's accounts: (1) Maharastra Forest Project 50,38,523 (2) Fuel Wood/Bamboo Planataion By using WFP Funds 5,479 (3) Forest Development Tax Schemes 16,07,222 66,51,224 In Note B-22 the auditors have also stated that as a result of the above accounting policies the profits shown in the P&L a/c are lower. 7. The AO in the course of assessment proceedings called upon the assessee to explain as to why this interest earned by the assessee by investing the idle funds referred to above should not be treated as income of the assessee. The AO also-called upon the assessee to explain as to why the assessee had changed its accounting practice in respect of the interest earned as aforesaid. 8. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l business division, thus falling beyond the scope of taxability provided by the IT Act, 1961, and the legal pronouncements available on the subject. (2) The learned CIT(A) has erred in not discussing in detail the various arguments putforth by the appellant-company in protest of the pattern of assessment followed by the AO in treating the amount of Rs. 66,51,224 as the interest income of the appellant-company chargeable to tax under the IT Act, 1961, under the head 'Income from other sources'. The learned CIT(A) has erred in not appreciating the argument of the appellant-company that the aforesaid amount of Rs. 66,51,224 is the income of the appellant earned in its agricultural business division, and, therefore, should not have been taxed in view of the scope of the Act and the legal pronouncements available on the subject. The CIT(A) should have, therefore, allowed capitalization/adjustment of this receipt in the agriculture division against the expenditure capitalized by the appellant on its long-term plantations. (3) The learned CIT(A) has also erred in considering interest receipt of the appellant as chargeable to tax without giving an allowance in respect of interest paid/p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... C) 489 : (1971) 82 ITR 452 (SC). (9) The learned CIT(A) has erred in ignoring that in case the AO attempted to consider the capitalized interest receipt as a revenue receipt, he will not have an option to ignore the capitalization of the interest expenditure which is much more than the income on account of interest. This adjustment would be automatic in terms of the decision of the Bombay High Court in the case of CIT vs. Smt. Archana R. Dhanwatey (1981) 24 CTR (Bom) 142 : (1982) 136 ITR 355, 360 (Bom). 12. Ground Nos. 1 and 2 are the main grounds of appeal. Ground Nos. 5 to 9 are supportive of ground Nos. 1 and 2 and they can be dealt while dealing with ground Nos. 1 and 2. Ground Nos. 3 and 4 are common to ground Nos. 1 and 2 and will stand covered while dealing with ground Nos. 1 and 2. 13. Ground No. 1: The submission of the learned counsel for the assessee in this regard is that interest of Rs. 98,88,751 comprising of Rs. 88,44,710 being interest on short-term deposits and the remaining amount of interest from savings bank A/c, interest on vehicle and house advance loan to employees all arise out of the business of the assessee. Since the business of the assessee is agricu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ue is not referable in any way to the agricultural relationship of landlord and tenant, but is attributable solely to their character as creditor and debtor. It is said that interest in its nature is merely that commercial compensation which either the accepted practice of business or in some case the legislature has adopted to see that a creditor does not suffer from the default of his debtor. That, it is said, has nothing whatever to do with the relationship of landlord and tenant and, therefore, is not in any way derived from the agricultural land which is the subject-matter of the tenancy. That is one way of putting it. The other way of putting it is that interest on arrears of rent is something which in this case has been introduced by the United Provinces Tenancy Act as a condition of the relationship between landlord and tenant. Arguing from that, it is said that, whether or not such interest can be strictly classified as rent, it certainly can be classified as coming within the larger expression 'revenue' which forms part of the definition of agricultural income it will be remembered that the definition speaks of 'any rent or revenue derived from land'. Those who put it in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rejecting the claim of the assessee in this regard. In the light of this clear verdict of the Hon'ble Privy Council on the point canvassed by the learned counsel for the assessee we are of the view that the interest income of Rs. 88,44,710 was rightly assessed as income from other source by the Revenue authorities. Similarly, the remaining interest income was rightly assessed as business income of the assessee liable to income-tax and not income from agriculture. 17. Ground No. 2: The submission of the learned counsel for the assessee in this regard is as follows. The aforestation undertaken by the corporation includes receiving funds from the Government of Maharastra or from elsewhere under the schemes approved by the Government, for development of forests, on a long-term basis which ranges upto 40 years. All expenditure incurred during this long development period is capitalized to the respective project accounts and are brought back to revenue proportionately as the income start coming in, at several stages during the aforesaid long period of gestation. This capitalization of expenses also includes the element of interest paid on borrowings in the intervening period. Since the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iness. That does not mean that until and unless the company commences its business, its income from any other source will not be taxed. If borrowed capital is used for the purpose of earning income that income will have to be taxed in accordance with law. The amount of interest received by the company flows from its investments and is its income and is clearly taxable even though the interest amount is earned by utilising borrowed capital. It is true that the company will have to pay interest on the money borrowed by it. But that cannot be a ground for exemption of interest earned by the company by utilising the borrowed funds as its income. The interest earned by the assessee is clearly its income and unless it can be shown that any provision like s. 10 has exempted it from tax, it will be taxable. The question of adjustment of interest payable by the company against the interest earned by it will depend upon the provisions of the Act. The expenditure would have been deductible as incurred for the purpose of business if the assessee's business had commenced. But that is not the case here. The assessee may be entitled to capitalise the interest payable by it. But what the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to be necessarily dismissed. 23. As to whether the decision in Tuticorin Alkali's case will apply where there has been commencement of business or not was considered by the Hon'ble Madras High Court in the case of South India Shipping Corporation Ltd.'s case. The assessee in the said case sought to set off interest paid on overdraft taken for business against the interest it received from the bank on deposits. The decision of the Hon'ble Supreme Court was sought to be distinguished as not applicable in view of the fact that the assessee in the case before the Madras High Court had commenced business. The Madras High Court held as follows: "The learned counsel for the assessee, however, contended that the decision of the apex Court was in the background of the fact that the assessee therein had not commenced business and, therefore, could not have claimed that the income received on fixed deposits was part of its business income and, therefore, the law laid down therein is inapplicable to the facts of this case. We do not find it possible to agree with the learned counsel that the law laid down in that case is confined to cases where a company has not commenced business. The Cour ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nditure incurred in connection with earning the interest. The learned Departmental Representative relied on the decision of the Indore Bench in the case of Mandideep Engg. & Packaging Industries (P) Ltd. vs. Dy. CIT (2001) 71 TTJ (Ind) 954 : (2001) 77 ITD 307 (Ind) and submitted that interest paid could not be termed as expenditure incurred wholly and exclusively for earning income from other sources. We are of the view the issue stands squarely covered in favour of the Revenue consequent to the decision of the Indore Bench relied on by the learned Departmental Representative. The Indore Bench on a similar claim for deduction held as follows after considering several decisions of High Courts on the issue: "From a careful perusal of the relevant provisions of the taxing Act in the light of the aforesaid judicial pronouncements and the rival submissions, we are of the view that while computing the income under the head "income from other sources" under s. 56 of the Act, only those deductions are allowed to be deducted which are enumerated under s. 57 of the Act. The deductions claimed under s. 36 of the Act cannot be allowed to be deducted from the income from other sources while co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ." 25. In Karnataka Forest Plantations Corporation Ltd. vs. CIT (1986) 53 CTR (Kar) 308 : (1985) 156 ITR 275 (Kar), the Hon'ble Karnataka High Court had occasion to deal with a similar question. The Karnataka Forest Plantations Corporation Ltd., a wholly-owned company of Government of Karnataka, which was the petitioner before the High Court engaged in the business of developing land for raising forest plantations like eucalyptus, bamboo, tropical pipes, rubber, cashewnut, cocoa and other varieties in the State. For carrying on its business operations, the corporation borrows large amounts from the Government of Karnataka and banks from time to time and those amounts that are not immediately required for carrying on its business operations, as a matter of prudent business proposition and necessity, were invested in the same or other banks in current account and short-term deposits from which it earns interest at lower rates which receipts have given rise to these proceedings under the IT Act, 1961 (Central Act 43 of 1961) ("the Act"). For the asst. yrs. 1976-77 and 1977-78 relevant to the accounting years ending on 31st March, 1976 and 31st March, 1977, respectively, the corporati ..... X X X X Extracts X X X X X X X X Extracts X X X X
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