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TMI Blog1995 (9) TMI 25X X X X Extracts X X X X X X X X Extracts X X X X ..... or the first time on October 31, 1978. It is common ground that during the entire year, the company was engaged in the process of erection of its plant and machinery and construction of the factory. The assessee received an amount of Rs. 25,532 as interest from the State Bank of India and two sister concerns. It also incurred an interest obligation of Rs. 2,666 on its loan to the extent of rupees one lakh from the State Bank of India. It is not in dispute that the interest receipt was from advances made out of paid-up capital amounts. The assessee filed a 'nil' return and contended that the interest receipt had been credited to the pre-operative expenses account and that it should be treated as reduction in the project cost, not income in the ordinary sense of the word. An extract from the publication issued by the Research Committee of the Institute of Chartered Accountants of India was furnished in support of its stand. The Income-tax Officer, however, took the view that the entire amount is taxable and that there is no deduction possible either in respect of interest paid or other expenses. Accordingly, the Income-tax Officer brought the entire amount of Rs. 25,532 to tax. This ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iners, discount received on purchase, etc., where such receipts merely go to reduce the cost of goods and do not constitute income independently by themselves. Learned standing counsel appearing for the Department, submitted that the interest accrued on the deposit of borrowed amount before the commencement of commercial production and the interest accrued on the deposit of share capital are two different concepts. The two kinds of interest are from two different sources. Therefore, one cannot be adjustable with the other. According to learned standing counsel, the interest received on the deposit of share capital would not go to reduce the cost as stated by the Tribunal. Inasmuch as the income derived from the deposit of share capital is income of the assessee, it is assessable under the head " Other sources ". In order to support the above contentions, learned standing counsel relied upon the decisions in CIT v. Seshasayee Paper and Boards Ltd. [1985] 156 ITR 542 (Mad) ; CIT v. Derco Cooling Coils Ltd. [1992] 198 ITR 375 (AP) ; Andhra Pradesh Carbides Ltd. v. CIT [1992] 198 ITR 386 (AP) ; Godavari Fertilizers and Chemicals Ltd. v. CIT [1992] 198 ITR 388 (AP) and CIT v. Modi Rub ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... order passed by the Tribunal in holding that the interest income is not chargeable to tax. The fact remains that the assessee is a private limited company incorporated on May 28, 1977, with the object of doing business in manufacture and sale of pyrotechnic aluminium powder. Its paid-up capital was Rs. 6.05 lakhs. The accounts were closed for the first time as on October 31, 1978. During the entire year, the company was engaged in the process of erection of its plant and machinery and construction of the factory. The assessee received an amount of Rs. 25,532 as interest from the State Bank of India and two sister concerns. The assessee also paid an interest of Rs. 2,666 on its loan to the extent of rupees one lakh from the State Bank of India. The interest received was from the advances made out of paid up capital amounts. According to the assessee, in view of an extract from the publication issued by the Research Committee of the Institute of Chartered Accountants of India and on the basis of the decision of the Supreme Court rendered in Challapalli Sugars Ltd.'s case [1975] 98 ITR 167, the interest paid by the assessee on the borrowed capital is adjustable towards the interest ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ss income during the year and hence there was no question of application of sections 70 and 71 of the Income-tax Act, 1961, during the assessment year in question and only in the computation of business income, expenditure or set-off of the loss from the income from business would arise. The Tribunal was not, therefore, justified in holding that the interest receipts could not be assessed and the difference between the interest paid and the interest received should be capitalised. The interest earned by the assessee on investment of share capital in call deposits could be assessed separately under the head 'Other sources'. " It is no doubt true that the decision of the Supreme Court in Challapalli Sugars Ltd. v. CIT [1975]98 ITR 167 and the view of the Expert Committee of the Institute of Chartered Accountants of India were not placed before this court while rendering the abovesaid judgment. A similar question came up for consideration before the Andhra Pradesh High Court in CIT v. Derco Cooling Coils Ltd. [1992] 198 ITR 375. According to the facts arising in that case for the assessment year 1977-78, the accounting year ended on September 30, 1976. The assessee-company had not y ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... further. In that case, the question was whether the bank interest received during the stage of construction of the factory on account of depositing a part of the borrowed money in the bank should be treated as 'income from other sources', or whether it should go towards reducing the actual capital cost of the assets. This court put its seal of approval on the accountancy principle stated in paragraphs B.1 and B.2 of the booklet Study on Expenditure during Construction Period ". In CIT v. Derco Cooling Coils Ltd. [1992] 198 ITR 375 (AP), while considering the decision in the case of Nagarjuna Steels Ltd.'s case [1988] 171 ITR 663 (AP), the Andhra Pradesh High Court further observed that : " The question is whether the same principle can be extended to a case like the present one where the interest is earned on an amount unrelated to the amount for which interest was paid. In other words, the question is whether the amount received by way of interest on share capital amount could be set-off against the interest payment made by the assessee during the same accounting year in respect of a different source of money, viz., borrowed loan amount. As already noticed, the view of the Trib ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... while taking note of the decision of the Special Bench in Arasan Aluminium Industries' case which is now under reference before us, observed that : " However, it is to be noted that the decision of the Special Bench in Arasan Aluminium Industries' case [1982] 1 ITD 10 (Mad) must be deemed to have been disapproved by the Madras High Court (vide CIT v. Seshasayee Paper and Boards Ltd. [1985] 156 ITR 542), in which the reference was answered in favour of the Revenue ". Again the Andhra Pradesh High Court had an occasion to consider the question of similar nature in the case of Andhra Pradesh Carbides Ltd. v. CIT [1992] 198 ITR 386, wherein the Andhra Pradesh High Court, while answering the question " Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the interes paid in respect of borrowing from the Andhra Pradesh Industrial Development Corporation Ltd. by the assessee could not be allowed to be set-off against the interest income earned by the assessee of Rs. 12,497 in the assessment year 1978-79 ? " held as under : " We are inclined to agree with the view taken by the Tribunal. We are unable to see any connection between the tw ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e same time, the assessee had paid a sum of Rs. 58,51,505 as interest on funds borrowed by it for the purpose of its business. During the year, the assessee had received a sum of Rs. 2,742 from the sale of empty gunny bags. Out of the total expenses of Rs. 83,32,473 incurred during the year, the assessee treated a sum of Rs. 1,04,190 as an item which could not be capitalised. Out of the balance amount of Rs. 82,28,283, the assessee deducted the two items of income, viz., interest and miscellaneous income, amounting in all to Rs. 3,17,108 and capitalised the balance of Rs. 79,11,175. Hence, the assessee adjusted the income earned by it during the period of construction against its other expenses and took the net amount as the expenses of construction. On these facts, while answering the question : " Whether, on the facts and in the circumstances of the case, the interest income of Rs. 3,14,366 and miscellaneous income of Rs. 2,742 are not taxable under section 56 of the Income-tax Act, 1961, under the head 'Income from other sources' for the assessment year 1977-78 ? " the Bombay High Court held that the whole arrangement of obtaining the finance and its temporary utilisation formed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted in CIT v. Maharashtra Electrosmelt Ltd. [1995] 214 ITR 489, relied upon the decision of the Andhra Pradesh High Court rendered in CIT v. Nagarjuna Steels Ltd. [1988] 171 ITR 663 in order to come to its conclusion that the whole arrangement of obtaining the finance and its temporary utilisation formed one composite transaction and, as such, the interest received by the assessee on account of temporary utilisation of the loans could not be considered in isolation, even though there was no support for this proposition found in the decision of the Andhra Pradesh High Court rendered in the case of Nagarjuna Steels Ltd. [1988] 171 ITR 663. The Delhi High Court had an occasion to consider a question of similar nature in the decision reported in CIT v. Modi Rubber Ltd. [1994] 208 ITR 379. According to the facts arising in that case, the assessee-company, which was still in the process of setting up its factory and had not commenced business, had invested the money received from its shareholders towards share capital in fixed deposits in banks. One of the subsidiary objects of the company as per clause B.19 of its memorandum of association, empowered the company to invest any moneys n ..... X X X X Extracts X X X X X X X X Extracts X X X X
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