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TMI Blog1998 (12) TMI 4X X X X Extracts X X X X X X X X Extracts X X X X ..... ion under section 256(1) of the Income-tax Act, 1961 (see [1988] 170 ITR 522, 529) : At the instance of the Revenue : "Assessment year 1965-66 : Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in holding that the hire charges of Rs. 56 received by the assessee-company for letting out the plant and machinery to the contractors were not taxable? Assessment year 1966-67 : (1) Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in holding that the hire charges of Rs. 7,224 received by the assessee-company for letting out of the plant and machinery to the contractors were not taxable? (2) Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the royalty of Rs. 8,530 received from the contractor was not taxable as it was of capital nature and not revenue? Assessment year 1967-68 : (1) Whether on the facts and in the circumstances of the case, the Tribunal was justified in law in holding that the hire charges of Rs. 12,195 received by the assessee-company for letting out of the plant and machinery to the contractors were not taxable ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 3 advanced to the contractor was not taxable? (2) Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in holding that the hire charges of Rs. 3,68,442 received by the assessee-company for letting out the plant and machinery to the contractors were not taxable? (3) Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the royalty of Rs. 6,504 received from the contractors is not taxable as it is capital in nature and not revenue? (4) Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in holding that the interest received amounting to Rs. 7,39,332 by the assessee-company on the amount advanced to Hindustan Steel Ltd. is not taxable?" For the assessment year 1972-73 a consolidated reference was made at the instance of the Revenue as well as the assessee and the following questions were referred (see [1988] 170 ITR 545, 547) : "(1) Whether, on the facts and in the circumstances of the case, the receipts arising from the letting out of the quarters to the outsiders, such as employees of the contractors engaged in the construction of the plant ca ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... under which the assessee had made certain advances to the contractors to enable them to execute the large scale construction work smoothly. The assessee had agreed to advance these advances to the contractors on payment of interest. The contractors thus did not have to raise funds from outside agencies. For the assessee-company, this arrangement primarily meant payment in advance of the amounts of the contractors' bills for which the assessee-company had charged interest. This interest was later adjusted against the dues of the contractors. (3) For the purpose of the construction work, the assessee had given on hire certain plant and machinery to the contractors. Against the letting of plant and machinery the assessee received from the contractors income in the form of hire charges. It was not the business of the assessee-company to let out plant and machinery to others. The assessee-company permitted its use only to its own contractors for the construction work done by the contractors for the assessee-company. The Tribunal has found that the assessee-company charged hire charges for such use of plant and machinery in order to cover the maintenance and wear and tear of the plant ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... harges for plant and machinery which was given to the contractors by the assessee for use in the construction work of the assessee, and thirdly, interest from advances made to the contractors by the assessee for the purpose of facilitating the work of construction. The activities of the assessee in connection with all these three receipts are directly connected with or are incidental to the work of construction of its plant undertaken by the assessee. Broadly speaking, these pertain to the arrangements made by the assessee with its contractors pertaining to the work of construction. To facilitate the work of the contractors, the assessee permitted the contractors to use the premises of the assessee for housing its staff and workers engaged in the construction activity of the assessee's plant. This was clearly to facilitate the work of construction. Had this facility not been provided by the assessee, the contractors would have had to make their own arrangements and this would have been reflected in the charges of the contractors for the construction work. Instead, the assessee has provided these facilities. The same is true of the hire charges for plant and machinery which was give ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at judgment to the effect that "if the company, even before it commences business, invests the surplus funds in its hands for purchase of land or house property and later sells it at profit, the gain made by the company will be assessable under the head 'Capital gains'. Similarly, if a company purchases a rented house and gets rent, such rent will be assessable to tax under section 22 as income from house property. Likewise, a company may have income from other sources.... The company may also, as in that case, keep the surplus funds in short-term deposits in order to earn interest. Such interest will be chargeable under section 56 of the Income-tax Act". This court also emphasised the fact that the company was not bound to utilise the interest so earned to adjust it against the interest paid on borrowed capital. The company was free to use this income in any manner it liked. However, while interest earned by investing borrowed capital in short-term deposits is an independent source of income not connected with the construction activities or business activities of the assessee, the same cannot be said in the present case where the utilisation of various assets of the company and th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Ltd. had replaced the eight locomotives lent by the assessee-company to it by new ones. The entire nature of the transaction was changed between the parties. There was a resolution of the assessee-company in this regard and the income from interest did not result at all as the original agreement ceased to be operative ab initio. The entry in the books which was made was about a hypothetical income which did not materialise and the entry was reversed in the next year. Both the Tribunal as well as the High Court have held that since this entry reflected only hypothetical income, it could not be brought to tax as income. Only real income can be brought to tax. In support of this finding, the assessee has drawn our attention to a decision of this court in Godhra Electricity Co. Ltd. v. CIT [1997] 225 ITR 746, where the court, inter alia, examined the cash system and the mercantile system of accounting in the context of hypothetical income. The computation of income is made in accordance with the method of accounting regularly employed by the assessee. It may be either the cash system where entries are made on the basis of actual receipts and actual outgoings or disbursements or it ma ..... X X X X Extracts X X X X X X X X Extracts X X X X
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