TMI Blog2004 (9) TMI 28X X X X Extracts X X X X X X X X Extracts X X X X ..... e incurred for earning the interest income u/s 36(1)(iii)?" - - - - - Dated:- 24-9-2004 - Judge(s) : D. K. SETH., R. N. SINHA. JUDGMENT D.K. Seth J. - Identical question has been set forth before us for decision in this reference under section 256(2) of the Income-tax Act, 1961, and the appeal under section 260A thereof. Therefore, both these cases were taken up together and have been addressed by learned counsel for the respective parties simultaneously. The assessee being one and the same and it related to only two different assessment years consecutively, we have taken up the matter together and propose to dispose of the same by one common judgment. The question: The questions that have been set forth in the reference are as follows: (1) Whether, on the facts and in the circumstances of the case, the amount of interest paid is allowable as a deduction under section 57 of the said Act while computing the interest income assessed as income from other sources under section 56 of the Act? (2) Whether, on the facts and in the circumstances of the case, the hon'ble Tribunal was justified in holding that there was no nexus between the interest expenditure incurred by th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (1) or under section 57(iii): Dr. Pal had argued that since the objects clause in the memorandum of association included borrowing and lending, viz., advancement of money, therefore, the interest earned on advancement of money is also to be treated as business, entitling him to claim the benefit of the interest paid on the borrowed sum under section 36(1) as deduction. Alternatively, he claimed that if it cannot be a business income and if it is treated as income from other sources, then it would be eligible for deduction under section 57(iii). Admittedly, the assessee had not commenced its business till the relevant assessment year. The objects clause might include borrowing and lending, i.e., advancement of money, but such advancement of money must be in the course of its business. Admittedly, the business was not commenced. Therefore, even if any income was earned on this surplus fund pursuant to this object of borrowing and lending, i.e., advancement of money, the same would not be a business income. That apart this investment was not made for business purpose; inasmuch as the money was borrowed for the purpose of establishing or constructing a project with the object of ca ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he borrowing was made for the purpose of construction of the project and instead of retaining the amount, the unutilised part was invested in short-term deposits. Whether it was invested or not, on the borrowing the assessee was bound to pay interest and the assessee was at liberty to capitalise the amount of interest paid on the borrowed capital so long the business does not commence. The interest was otherwise payable on the borrowing whether invested or not. This amount was borrowed not for the purpose of investment of money in order to earn the income. Therefore, it cannot be said that the interest paid on the borrowed capital was laid out or expended wholly and exclusively for earning such income. The expression is clear and unambiguous. The expenditure must be incurred wholly and exclusively for the purpose of earning such income in the course of its business. In this case, it cannot be so said. The money was borrowed for the purpose of construction of the project. The interest paid thereon was not an expenditure laid out or expended wholly and exclusively for the purpose of earning the interest out of such deposit; on the other hand, this was laid out or expended out of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... haracter of the receipt and the question of adjustment would depend upon the provisions of the Act. In fact, interest paid on the borrowed capital would have been deductible as incurred for the purpose of business but the assessee's business was not commenced. Therefore, the assessee would be entitled to capitalise the interest so payable. But the assessee could not claim adjustment of this expenditure against interest assessable under section 56. However, the assessee did not claim deduction under section 57. In these circumstances, this decision proceeded to hold that this amount was not adjustable under section 70 or 71 since its business had not started. This was sought to be distinguished by Dr. Pal that in this case the question of adjustment is not claimed, at the same time, the impact of section 57(iii) was not involved in the said decision and that there was no such finding that the said decision is distinguishable. May be, the Supreme Court was not called upon to decide the impact of section 57(iii) in respect of the interest earned vis-a-vis the interest paid. But the question is dependent on the fact whether the assessee had commenced its business. So long the busines ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pts. This decision was held to have laid down the law correctly by the apex court in Tuticorin Alkali Chemicals and Fertilizers Ltd. [1997] 227 ITR 172 and contrary views expressed in 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) were held to be erroneous. The decision in Tuticorin Alkali Chemicals and Fertilizers Ltd. [1997] 227 ITR 172 (SC) was reiterated and followed in CIT v. Dr. V.P. Gopinathan [2001] 248 ITR 449 (SC) and South India Shipping Corporation Ltd. v. CIT [1999] 240 ITR 24 (Mad) and was also followed by the apex court in CIT v. Autokast Ltd. [2001] 248 ITR 110 (SC). In the Madras case, it was held that the interest paid on overdraft obtained for the purpose of business could not be deducted from the interest earned on monies kept in fixed deposits; as such the income derived by way of interest on fixed deposits was to be taxed under the head "Income from other sources" since the interest paid on the overdraft did not qualify for deduction under section 57(iii). In CIT v. Bokaro Steel Ltd. [1999] 236 ITR 315, the apex court had also ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... advancing money and earning interest is an object and the business commenced with the advancement of the money: Now turning to the question as to whether the object of advancing money would be relevant for the purpose, Mr. Agarwal had relied upon Thiagarajar Charities v. Addl. CIT [1997] 225 ITR 1010. The apex court in that decision relying upon an English decision had held as follows: " 'It drew a distinction between the objects in a memorandum of association and the powers taken in the memorandum of association to carryout those objects. Reliance had been placed on a decision of the Court of Appeal in North of England Zoological Society v. Chester Rural District Council [1959] 3 ALL ER 116 (CA) which in turn referred to a decision of the House of Lords in Cotman v. Brougham. [1918] AC 514 (HL). Lord Wrenbury expressed the view in Cotman v. Brougham that there may be included in the objects what are not real objects of the company but are enabling powers to achieve the objects of the company. A passage from the judgment of Lord Wrenbury at page 522 may be extracted: "The objects of the company and the powers of the company to be exercised in effecting the objects are differe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tilised part of the fund is invested and interest is earned, the same would not be an income from a business yet to commence. Utilisation of unutilised funds cannot be said to be a part of the business for which the fund was borrowed. Therefore, this decision stares on the face. Conclusion: We need not dilate on this question because of the distinction we have already made, namely, until the business commences the interest paid on the borrowed capital for acquiring asset is includible in the actual cost within the meaning of Explanation 8 to section 43(1) and it would not be a business expenditure till the asset is first put to use and until the business commences the interest received on investment of unutilised funds will not be a business income, when such interest, until the business commences, is in the nature of capital expenditure and is eligible for being capitalised. The purpose of the borrowing was for the purpose of construction of the project and the interest would have been paid even if it would not have been invested. Therefore, this interest could not be said to have been laid out or expended for the purpose of earning the income particularly when the interest pa ..... X X X X Extracts X X X X X X X X Extracts X X X X
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