9911796707
TMI Blog1987 (11) TMI 72X X X X Extracts X X X X X X X X Extracts X X X X ..... 1977-78. The assessee-company was incorporated on July 19, 1974. The main objects of the company were to own and acquire ferrous and non-ferrous metal melting furnaces, rolling mills and to carry on business as traders and manufacturers of ferrous and non-ferrous metal ingots, etc., and to do business of traders or manufacturers of steel products and hardware of all kinds, and also to act as stockists, commission agents, etc., for engineering and industrial requirements. In the return filed by the assessee for the assessment year 1977-78, it showed its total income as " nil " and gave the following computation of its income " I. Income from business : Rs. Rs. The company is still under construction stage and has yet to commence production. The expenses incurred during construction period, pending allocation to capital account, are detailed in the notes attached to the balance-sheet as at 30-6-1976. The interest income received by the company is being treated as part of the business income, pursuant to one of the objects for which the company is established. Since it is being treated as business income, a portion of the expenditure incurred has to be de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be deducted from the interest paid by the assessee during the relevant assessment year. On appeal, the, Commissioner (Appeals) affirmed the order of the Income-tax Officer. On further appeal, however, the Tribunal took a different view. Relying upon the notes prepared by the Institute of Chartered Accountants of India on " A study on expenditure during construction period ", the Tribunal held that the proper method to be adopted in such cases is not to treat the said interest amount of Rs. 15,092 as income from other sources, but to treat the same, as also the interest paid by the assessee on the loans obtained by it, as one single account. This is what the Tribunal said : " It is, therefore, clear that on the facts of the present case, receipts and payments of interest have to be considered as in a single account. Therefore, the receipts of interest would go to reduce the payment of interest. As we have already pointed out, interest payments were to the extent of Rs. 7,94,389 and interest receipts were to the extent of Rs. 15,092. Thus the amount of interest to be considered for capitalisation purposes would, on the facts of this case, be only the net figure, i.e., Rs. 7,79,29 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ding upon its nature, in accordance with the various principles suggested above. For example, income from share transfer fees may be set off against the various corporate expenses incurred during the construction or preproduction period and income, if any, from lending transport vehicles to outsiders may be set off against the expenditure incurred in operating and maintaining those vehicles. Similarly, interest income earned during the construction period may be off-set against interest expenses incurred during this period ... ". In our opinion, the course indicated by the Institute of Chartered Accountants of India is the proper one to be adopted in such circumstances. Indeed, a somewhat similar case had arisen before us in R.C. No. 134 of 1982, disposed of on April 2, 1987 (CIT v. Andhra Farm Chemicals Corporation [1988] 171 ITR 660). There, a subsidiary company had borrowed certain funds from its parent company. The subsidiary company, the assessee, was in its formative period. With a view not to keep the borrowed money idle, it deposited a part of the same with the holding company, which was to mature only by December 31, 1974. Meanwhile, the assessee required some amount and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Rs. 1,75,471 as interest on such deposits, while during the same period it paid to the Government U.P. a sum of Rs. 9,54,588 as interest. The assessee, since it was an existing company and already engaged in another business, claimed the difference between the interest earned and interest paid, i.e., Rs. 7,79,117, as revenue expenditure, which was disallowed by the Income-tax Officer on the ground that the expenditure had nothing to do with the existing business of the assessee, but related to a separate unit altogether which was still under erection. The Appellate Assistant Commissioner affirmed the said view. On further appeal, the Tribunal held that the amount paid by way of interest should be allowed as a deduction as against interest earned from the bank in terms of the loan; that as the assessee had to keep the money in deposit with the bank segregated from its other business assets, the interest earned from the deposits would be "income from other sources ", and that by adopting a different method of assessment, the Income-tax Officer could not defeat the assessee's claim. It held that the interest paid by the assessee towards loan to the Government should be set off agains ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in Addl. CIT v. Madras Fertilisers Ltd. [1980] 122 ITR 139. The facts of this case too are again somewhat similar. But here too, a finding was recorded that there was no direct connection between the interest paid and the interest received. This finding again, in our opinion, is a distinguishing factor. On the other hand, learned counsel for the assessee relied upon decision of the Delhi High Court in Snam Progetti S. P. A. v. Addl. CIT [1981] 132 ITR 70. In this case, Snam Progetti, an Italian companv carrying on business as engineers and contractors in the field of petroleum and petrochemical plants, was engaged in India having huge contracts, each running into millions of dollars, which necessitated the assessee having large liquid funds. The excess business funds were placed in short-term deposits with the bank and interest income was earned thereon. For the assessment year 1970-71, the assessee incurred a net business loss of Rs. 122 lakhs, but in the next assessment year 1971-72, it earned a profit of Rs. 30 lakhs and interest income of about Rs. 5 lakhs. The assessee sought to carry forward the business loss incurred in the assessment year 1970-71 and set it off against th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sagreed with the departmental authorities that the said interest income should be treated as " income from other sources ". It was of the opinion that the payment of interest on the loans obtained by the assessee and earning of interest on short-term deposits made by it out of the amounts borrowed must be treated as a single transaction. On the above finding, we are of the opinion that the question referred does not really arise, because the interest income earned cannot be treated as income from other sources. As held by us in R.C. No. 315 of 1982, the said interest income has to be set off against the interest paid by the assessee during the relevant assessment years and the balance of interest capitalised. Accordingly, we decline to answer the question referred while affirming the correctness of the decision of the Tribunal. No costs. R. C. No. 12 of 1985.-The assessee in this case is the A.P. Forest Development Corporation, Hyderabad, and the question referred is: " Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal is justified in holding that interest received on short-term deposits is not assessable under the head 'Other so ..... X X X X Extracts X X X X X X X X Extracts X X X X
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