TMI Blog1993 (4) TMI 107X X X X Extracts X X X X X X X X Extracts X X X X ..... ny made deposits of surplus funds in the bank in short-term deposit schemes. On these deposits the company earned interest amounting to Rs. 22,99,975. The Assessing Officer treated the amount earned by way of interest as Income under the head " other sources ", and refused to adjust this amount against interest paid Rs. 65,33,104 on the ground that the funds were not loan to the company for making short-term deposits. Therefore, any income earned out of these deposits has nothing to do with the assessee's business. Interest paid on the borrowed capital is clearly an expenditure related to the main business and income earned out of short-term deposits is clearly an income from other sources. Since the business of the assessee-company has not commenced, it should be capitalised along with other expenses during the pre-operation period. Any expense out of a particular business cannot be an allowable expense for income from other sources. Therefore, interest is not allowable under section 57(iii) of the Income-tax Act. While coming to this conclusion, he has taken support from the decision of Delhi High Court in the case of Addl. CIT v. Indian Drugs Pharmaceuticals Ltd. [1983] 141 IT ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 3) CIT v. Nagarjuna Steels Ltd. [1988] 171 ITR 663 (AP) ; (4) CIT v. Cap Steel Ltd. [1986] 162 ITR 533 (Kar.) ; (5) CIT v. Tamil Nadu Industrial Development Corprn. Ltd. [1991] 189 ITR 670 (Mad.) ; (6)KarnatakaForestPlantations Corpn. Ltd.'s case. As against this, the learned counsel for the assessee Dr. D. Pal submitted that the company was in the stage of setting up a project. It has not commenced its business. Therefore, all the expenditure and receipt incurred by the assessee-company during this period would go towards cost of construction. Our attention was invited to the guidelines issued by theInstituteofChartered Accountantsgiven as under :-- " 8.2 Where a particular item of miscellaneous income can be directly related to a particular item of expenditure. It is suggested that it should be set off against the expenditure, and the net amount of the expenditure should be treated in the appropriate manner, depending 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, fr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the decision of CIT v. Bokaro Steel Ltd. (No. 1) [1988] 170 ITR 522 (Pat.). Continuing his arguments, the learned counsel for the assessee tried to distinguish the facts of the case before Special Bench of the Tribunal from the facts of the present case. The first distinguishing feature pointed was that in that case the company was wholly owned by the Government of India and was not receiving any loan from outside sources but was receiving the capital subscribed by the Government of India from time to time. During the year in question It has received a loan granted by the Government of India amounting to Rs. 47.94 crores and equity capital of the assessee stood at Rs. 20 lakhs and it came to be increased from year to year. As on31-3-1981, it stood at Rs. 203.58 crores. The total fund available at the end of31st March, 1981stood at Rs. 247.31 crores. The income derived from the interest from banks on short-term deposits stood at Rs. 96.6 lakhs besides there was other income of interest Rs. 26.03 lakhs. The gross amount of interest under both the heads came to Rs. 122.93 lakhs. Out of this gross interest income amount of Rs. 15.64 lakhs interest being paid was deducted. Besides this, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t be considered for earning the income. This view was taken by the Hon'ble Calcutta High Court in the case of Karanpura Development Co. Ltd. where a company was formed with the object to acquire a prospecting licence for mining coal and purchasing and selling mining rights and to carry on the business of colliery proprietors, miners etc., but the assessee restricted its activities to acquire coal mining leases etc. The company never worked in the coal field with a view to extract coal nor did it acquire or sell coal. The company received 'selami' for granting sub-lease. The question was whether the sums received a 'selami' by the assessee were trading receipts. In this connection, the Hon'ble Calcutta High Court has laid down that where a company acquires property which it sells or leases out with a view to acquire other property to deal with a same manner, the company is not held to be enjoying receipts in the shape of rent which it yield but as a kind of capital leading to profit of business which profit either may be enjoyed or be taken into business to acquire more profits for further exploitation. In the case of H. H. Maharani Shri Vijaykuverba Saheb of Morvi India Cements Ltd ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee earned income from fixed deposits and other deposits which was sought to be assessed as income from other sources. The Tribunal found that the assessee had utilised its commercial assets which were lying in the form of surplus cash, for earning interests which had arisen from utilisation of commercial assets. When the matter came before the Hon'ble Calcutta High Court, it was held that the Tribunal had found that the interest arose from utilisation of commercial assets. The funds utilised in making fixed deposits with banks were business funds lying temporarily surplus with the assessee. It was, therefore, assessable as business income and revenue expenditure could be deducted from it. Similar view was taken by the Hon'ble Delhi High Court in the case of Snam Progetti S. P. A. In view of the law laid down by the Hon'ble Supreme Court and various High Courts, it is clear that where a company as per its objects has invested surplus funds and earned income from these surplus funds, the expenditure incurred to earn this income, has to be set off against the interest received. 6. The accountancy principles also permit the same which is clear from the following observaticn ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... source of income from any business during the year in question. The major receipt of funds was from financial institutions and consequently it had paid interest. In this way, during the year under consideration, there was no source of income to the assessee-company. Receipt of the alleged income from the bank in fact was nothing but a wise and prudent act of the assessee to reduce the liability of the assessee towards interest which ultimately was to be counted towards capital expenditure of the plant. In the case of CIT v. Madho Pd. Jatia [1976] 105 ITR 179 (SC), it was held that where the provisions of the taxing statute are couched in language which is not free from ambiguity and admits of two interpretations a view which is favourable to the assessee should be adopted. This decision was followed in the case of Keshavji Ravji Co. v. CIT [1990] 183 ITR 1 (SC). In view of this, we have to interpret law in a way which is in consonance with equity and fair play. It is not in dispute that the entire amount of loan and contributions received by the assessee was to be counted towards the cost of investment in the plant. The liability of the interest before the completion of the plant ..... X X X X Extracts X X X X X X X X Extracts X X X X
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