1996 (5) TMI 73 - HC - Income Tax

Summary

Issues Involved:
1. Whether the interest earned by the assessee on fixed deposits is assessable under the Income-tax Act, 1961.
2. Whether the interest earned should be considered a capital receipt or income from other sources.

Detailed Analysis:

Issue 1: Assessability of Interest Earned on Fixed Deposits
The primary issue was whether the interest earned by the assessee on money kept in fixed deposits with a bank was assessable under the Income-tax Act, 1961. The assessee, a State Government undertaking engaged in various plantations, had invested surplus share capital in fixed deposits and earned interest. The Income-tax Officer (ITO) assessed this interest as income from other sources, which was upheld by the Appellate Tribunal.

The Tribunal's decision was challenged, and the High Court considered various provisions of the Income-tax Act, particularly sections 14, 56, and 57. Section 14 classifies income under different heads, including "Income from other sources" (Item F). Section 56 states that income not excluded under the Act shall be chargeable under "Income from other sources." Section 57 provides for deductions from such income.

The High Court concluded that interest is undoubtedly an income and not exempt under section 10. Therefore, it falls under "Income from other sources" as per section 56, and the interest earned on fixed deposits is assessable under this head.

Issue 2: Nature of Interest Earned (Capital Receipt vs. Income from Other Sources)
The assessee argued that the interest earned on fixed deposits should be considered a capital receipt since the funds were to be used later as capital for starting the business. The Commissioner of Income-tax (Appeals) and the Tribunal had initially favored this view, citing similar cases like Arasan Aluminium Industries and J. M. Aluminium Industries Ltd.

However, the High Court referred to various precedents, including the Supreme Court's decision in Challapalli Sugars Ltd. and other High Court decisions such as CIT v. Nagarjuna Steels Ltd., CIT v. Derco Cooling Coils Ltd., and CIT v. Tamil Nadu Industrial Development Corporation Ltd. These cases generally held that interest earned during the construction or pre-production period should be treated as income from other sources unless it could be directly set off against related expenditure.

The High Court emphasized that the interest earned on surplus funds, even if intended for future capital use, is assessable as income from other sources. The court noted that the accountancy principles and the provisions of the Income-tax Act do not support the view that such interest should be capitalized or exempted from tax.

Conclusion
The High Court held that the interest earned by the assessee on fixed deposits is assessable under the Income-tax Act as income from other sources. The Tribunal's decision to treat it as a non-assessable capital receipt was incorrect. The question was answered in the negative, against the assessee and in favor of the Revenue.