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TMI Blog1997 (7) TMI 4X X X X Extracts X X X X X X X X Extracts X X X X ..... ecifically permitted by the memorandum and articles of association of the company. The company had also deposited certain sums with the Tamil Nadu Electricity Board, It had also given interest-bearing loans to its employees to purchase vehicles. Up to the assessment year 1980-81, interest earned by the company from the various loans given by the company and also from the bank deposits was shown as income and was taxed accordingly. For the accounting year ending on June 30, 1981 (assessment year 1982-83), the assessee received a total amount of interest of Rs. 2,92,440. In its return of income filed on June 22, 1982, the company disclosed the said sum of Rs. 2,92,440 as " income from other sources ". It also disclosed business loss of Rs. 3,21,802. After setting off the interest income against business loss, the company claimed the benefit of carry forward of net loss of Rs. 29,360. The company later on realised its mistake and on December 26, 1984, it filed a revised return showing business loss of Rs. 3,21,802. It claimed that according to the accepted accounting practice, interest and finance charges along with other pre-production expenses will have to be capitalised, and tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t of decisions between the Madras and Andhra Pradesh High Courts, the Tribunal has referred the following question of law to this court for decision : " Whether, on the facts and in the circumstances of the case, interest derived by the assessee from the borrowed funds which were invested in short-term deposits with banks would be chargeable to tax under the head ' Income from other sources ' or would go to reduce the interest payable by the assessee on the term loans secured by the assessee from financial institutions, which would be capitalised after the commencement of commercial production ? " The facts of this case are not in dispute. In the usual course, interest received by the company from bank deposits and loans would be taxable as income under the head " Income from other sources " under section 56 of the Income-tax Act. It is argued on behalf of the company that it had not yet commenced its business and in any event the income was derived from funds borrowed for setting up the factory of the company and should be adjusted against the interest payable on the borrowed funds. In our judgment neither of the two factors can affect the taxability of the income earned by th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... terest. Such interest will be chargeable under section 56 of the Act. The company has chosen not to keep its surplus capital idle, but has decided to invest it fruitfully. The fruits of such investment will clearly be of revenue nature. This position in law was explained by Sir George Lowndes in the oft-quoted passage in the case of CIT v. Shaw Wallace and Co. [1932] 2 Comp Cas 276 ; 59 I. A. 206 : " Income, their Lordships think, in this Act connotes a periodical monetary return ' coming in ' with some sort of regularity, or expected regularity, from definite sources. The source is not necessarily one which is expected to be continuously productive, but it must be one whose object is the production of a definite return, excluding anything in the nature of a mere windfall. Thus income has been likened pictorially to the fruit of a tree, or the crop of a field. It is essentially the produce of something, which is often loosely spoken of as ' capital '. " In other words, if the capital of a company is fruitfully utilised instead of keeping it idle, the income thus generated will be of revenue nature and not an accretion to capital. Whether the company raised the capital by issue o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 71). In the facts of this case the company cannot claim any relief under either of these two sections, since its business had not started and there could not be any computation of business income or loss incurred by the assessee in the relevant accounting year. In such a situation, the expenditure incurred by the assessee for the purpose of setting up its business cannot be allowed as deduction, nor can it be adjusted against any other income under any other head. Similarly, any income from a non-business source cannot be set off against the liability to pay interest on funds borrowed for the purpose of purchase of plant and machinery even before commencement of the business of the assessee. It has been argued that the source from which the company has earned interest is borrowed capital. The company has to pay interest to its creditors on the same borrowed capital. Having regard to the identity of the fund on which interest is earned and interest is payable, the company should be allowed to set off its income against interest payable by it on the same fund. We are of the view that no adjustment can be allowed except in accordance with the provisions of the Income-tax Act. However ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... shareholders. There is no overriding title of anybody diverting the income at source to pay the amount to the creditors of the company. It is well-settled that tax is attracted at the point when the income is earned. Taxability of income is not dependent upon its destination or the manner of its utilisation. It has to be seen whether at the point of accrual, the amount is of revenue nature. If so, the amount will have to be taxed. Pondicherry Railway Co. Ltd. v. CIT [1931] 1 Comp Cas 314 ; AIR 1931 PC 165. Our attention was drawn to two other decisions where the view of the Andhra Pradesh High Court was followed. In the case of CIT v. Electrochem Orissa Ltd. [1995] 211 ITR 552, the Orissa High Court preferred the view expressed by the High Court of Andhra Pradesh to the view expressed by the Madras High Court in Seshasayee Paper and Boards Ltd.'s case [1985] 156 ITR 542 on the ground that the Madras case was based on a finding of fact that there was no direct connection between the interest paid and the interest received. In our view, it will not be right to read the judgment in Seshasayee Paper and Boards Ltd.'s case [1985] 156 ITR 542 (Mad) in that way. The court's finding in Se ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es but utilises that money to earn interest, however temporarily, the interest so generated will be his income. This income can be utilised by the assessee whichever way he likes. He may or may not discharge his liability to pay interest with this income. Merely because it was utilised to repay the interest on the loan taken by the assessee, it did not cease to be his income. The interest earned by the assessee could have been used for many other purposes. If the assessee purchased a house or distributed dividend or paid salary to its employees with the money received as interest, will the interest amount be treated as not his income ? This is not a case of diversion of income by overriding title. The assessee was entirely at liberty to deal with the interest amount as he liked. The application of the income for payment of interest could not affect its taxability in any way. The second reason given by the High Court was that the Institute of Chartered Accountants of India was a recognised authority on accounting principles. This fact has been recognised by this court in the case of Challapalli Sugars Ltd. v. CIT [1975] 98 ITR 167. Therefore, its view has to be respected. It is tr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rest is paid on share capital issued for the purpose of raising money to defray the expenses of constructing any work or building or the provision of any plant in contingencies mentioned in that section, the sum so paid by way of interest may be charged to capital as part of the cost of construction of the work or building or the provision of the plant. The above provision thus gives statutory recognition to the principle of capitalising the interest in case the interest is paid on money raised to defray expenses of the construction of any work or building or the provision of any plant in contingencies mentioned in that section even though such money constitutes share capital. The same principle, in our opinion, should hold good if interest is paid on money not raised by way of share capital but taken on loan for the purpose of defraying the expenses of the construction of any work or building or the provision of any plant. The reason indeed would be stronger in case such interest is paid on money taken on loan for meeting the above expenses." This court also relied on an English case in support of this conclusion in Hinds v. Buenos Ayres Grand National Tramways Co. Ltd. [1906] 2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ompanies Act itself and was also consistent with the views of the English Courts. But this is an entirely different case. Whether a particular receipt is of the nature of income and falls within the charge of section 4 of the Income-tax Act is a question of law which has to be decided by the court on the basis of the provisions of the Act and the interpretation of the term " income " given in a large number of decisions of the High Courts, the Privy Council and also this court. It is well-settled that income attracts tax as soon as it accrues. The application or destination of the income has nothing to do with its accrual or taxability. It is also well-settled that interest income is always of a revenue nature unless it is received by way of damages or compensation. In the premises, we are of the view that the Madras High Court came to the correct decision in the case of CIT v. Seshasayee Paper and Boards Ltd, [1985] 156 ITR 542. The contrary views expressed in the cases of CIT v. Nagarjuna Steels Ltd. [1988] 171 ITR 663 (AP) ; CIT v. Electrochem Orissa Ltd. [1995] 211 ITR 552 (Orissa) and CIT v. Maharashtra Electrosmelt Ltd. [1995] 214 ITR 489 (Bom) are erroneous. We are of the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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