TMI Blog1995 (3) TMI 151X X X X Extracts X X X X X X X X Extracts X X X X ..... . This submission was opposed by learned departmental representative. He submitted that assessee was trying to raise a new plea relating to business income and allowability of business expenditure. After considering submissions of both the parties, we permitted the assessee to argue on the ground clarified by it in its letter dated November 10, 1994. We proceed to consider the aforesaid ground. 3. The facts of the case, briefly stated, are that assessee-company was incorporated on May 31, 1990 to set up a plant for manufacture of cast polyester products like sanitary wares, etc. and other housing accessories. The assessee had a share capital of Rs. 20,52,920 up to last year ending 31-3-1991.The subscribed capital was increased to Rs. 1,33,50,210 up to the end of the previous year. The assessee also borrowed substantial amount from financial and other institutions. The assessee was still in the process of setting up its plant and on capital work in progress had spent Rs. 3,29,32,746 till the end of the accounting period. The surplus funds not required by the assessee were kept with the bank and other parties and on that assessee earned total interest of Rs. 12,16,453 besides misc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nly case is also that it has not been clearly established that it was loaned money that was invested) to earn interest with the intention of benefiting itself, and thereafter, tries to put forth the argument that such receipts should not be taxed. So the revenue loses all the way. Collection of revenue is obviously made to divert the money to more productive cases for development of the nation, and in tune with the philosophy of a welfare State. Here our friend wants to deny the commoners this benefit, and instead wants to reap the harvest for itself without sharing the booty with the rest of the nation. No quasi-judicial authority should allow this misappropriation of scarce national funds considering that precious foreign exchange has also been expended. Therefore, on the basis of all these judgments, and obviously following Delhi High Court's options voiced through its various judgments discussed above, it is held that interest paid at Rs. 19.19 lakhs shall be allowed to be capitalised and the interest income earned at Rs. 12,16,478 shall be taxed as 'Income from other sources'. The amount of interest paid cannot be deducted u/s 57 since it was not expended to earn this income. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s. 20,52,920 which in the year increased to Rs. 1,33,50,210. As against above, investment in fixed assets increased from Rs. 4,05,379 (as on 31-3-1991) to Rs. 3,29,32,746 in the year under consideration. Thus, the above figure clearly showed that entire share capital received in the year under consideration plus borrowings were utilised in the fixed capital assets. Therefore, without evidence it could not be held that share capital was deposited in the bank to earn interest. Thus documentary evidence demonstratively showed that the finding of the Assessing Officer to the contrary was erroneous and unjustified. 6. Shri Aggarwal further argued that in the case of mixed funds, the option was with the assessee to appropriate fund and expenditure in a manner most favourable to the assessee. Shri Aggarwal drew our attention to the decision of Hon'ble Calcutta High Court in the case of Indian Explosives Ltd. v. CIT [1984] 147 ITR 392 wherein the Court has referred to the decision of the House of Lords in Edinburgh Life Insurance Co. v. Lord Advocate 5 TC 472. In the present case also, entire funds, i.e., share capital, borrowings, etc., were put in common account from where amounts were ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of Indian Drugs Pharmaceuticals Ltd. Bombay High Court in the case of CIT v. L T McNeil Ltd. [1993] 202 ITR 662 and of Andhra Pradesh High Court in the case of Andhra Pradesh Carbides Ltd. v. CIT [ 1992] 198 ITR 386 (App.). Shri Haldhar also relied upon Special Bench decision of Tribunal in the case of National Thermal Power v. LAC [1988] 24 ITD 1 (Delhi). Shri Haldhar accordingly supported the impugned order. 9. We have given careful thought to the rival submissions of the parties. We have also considered case law cited before us. Before venturing to consider the legal controversy involved, we deem it necessary to resolve a minor dispute on facts. In the extract from assessment order quoted earlier, it is clear that the assessee was liable to pay interest of Rs. 19.19 lakhs to the financial institutions on loans initially taken for setting up of the factory. A part of above loans was not utilised in construction but was utilised in short-term deposits and therefrom interest of Rs. 12,16,478 was earned. There is no dispute on above. The Assessing Officer, however, held that interest was earned not only on borrowings but also on deposit of share capital. This is disputed. In i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ioned cases, it has been held that interest paid on borrowed capital on short-term deposits is not to be deducted from the interest paid on borrowings taken for construction of building or erection of plant. Gross amount of interest earned before the commencement of business is to be taxed. As noted by the Special Bench, the Hon'ble Karnataka High Court in the case of Cap Steel Ltd. decided the issue after considering the decision of Hon'ble Supreme Court in the case of Challapalli Sugars Ltd. v. CIT [1975] 98 ITR 167 and the recommendation of Research Committee of Institute of Accountants of India. 11. However, after the decision of the Special Bench given on October 20, 1987. the law on the subject further developed. This would be clear from the following decisions : In the case of Nagarjuna Steel Ltd., their Lordships of Andhra Pradesh High Court, again considered the recommendations of Institute of Chartered Accountants of India and decision of Supreme Court in the case of Challapalli Sugars Ltd., on the question 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 tre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of providing for the income-tax liability on such income (paragraph 8.4). [Emphasis supplied]. Prima facie, the term 'related items of expenditure' is suggestive of a nexus between the two transactions giving rise to receipt and expenditure but not a broad nexus based upon capital or revenue character of the receipt and expenditure. At any rate, in view of the apparent ambiguity, it is not possible to lay undue emphasis on the passages quoted above which, as already stated, furnished the main basis for the argument of the assessee's counsel. Section 56 of the Income-tax Act, 1961, enjoins that income of every kind which is not to be excluded from the total income under this Act shall be chargeable to income-tax under the head 'Income from other sources', if it is not chargeable to income-tax under any of the heads specified in section 14, items A to E. We will assume that an item of receipt that could be set off against or deducted from an item of expenditure which ought to be capitalised for accounting purposes shall not be treated as income in the ordinary sense of the term. Even then, to fall within the ambit of this principle, the receipt in question must be capable of being' l ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Hon'ble Delhi High Court in the case of Modi Rubbers Ltd. We would refer to the said decision in more detail hereinafter. It is thus clear that after the decision of Special-Bench their Lordships of Andhra Pradesh High Court had deducted interest paid on borrowings taken for construction of factory out of interest earned on such borrowings not utilised for purposes of construction and deposited with bank in short-term deposit. The recommendation of Institute of Chartered Accountants of India, not approved by Hon'ble Karnataka High Court, has been specifically approved by the Hon'ble Andhra Pradesh High Court. For allowing deduction of expenditure, the Courts laid down that nexus between receipt and expenditure is to be seen. Only expenditure related to the income earned could be deducted and net amount of expenditure capitalised. The aforesaid distinction and principle are different from the case law considered and applied by the Special Bench of the Tribunal. It is thus clear that two reasonable views of the matter in dispute are possible. In such a situation, a view favourable to the assessee is required to be adopted. Therefore, we hold that where interest is paid on borrowings ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... term deposit is to be deducted from interest receipt from such deposit. 12. The learned Assessing Officer has held that decisions of Hon'ble Delhi High Court are against the assessee. In this connection, she has referred first to the case of Snam Progetti (SPA). In that case, the assessee, an Italian Company, carrying on business as Engineers and Contractors in the field of Petroleum and Petro Chemical Plants, placed excess business funds in short-term deposit with the bank and earned interest income. The assessee suffered business loss and wanted the same to be carried forward and set off against interest income. The Assessing Officer rejected the claim that interest income be treated as business income. The assessee carried the matter in writ before the Hon'ble Delhi High Court and relied upon certain decisions of Supreme Court. The Hon'ble Delhi High Court accepted the claim of the assessee with the following observations : " In the present case, the assessee claimed that it has funds which it derived from business and which are used only in business and for no other purpose. If they are spare funds, then they are deposited in banks and, hence, it is clear that this income i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed to the contractors not with a view to charging them or making a profit, for, a surplus on an estimated basis had been treated as income in this respect. Here again, the source was not independent of, but was closely connected and interlinked with, the process of setting up the factory. Since the business had not been fully set up, the receipts were capital in nature. Therefore, the receipts did not constitute income liable to tax." As is clear from the above referred to decision, we do not find anything against the assessee. In a case recently decided, the Hon'ble Delhi High Court dealt with question of taxability of interest earned on share capital which was sought to be adjusted against other expenditure incurred by the assessee during the course of setting up of factory. The Court negatived the claim made by the assessee. However, the broad distinction between interest earned on share deposit and that earned on surplus borrowed funds taken for construction but utilised for earning interest was appreciated by the Hon'ble Court. After review of all relevant law, the Hon'ble Court observed as under : " Thus, we find there is a chain of authorities of the High Courts holding ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
