TMI Blog1994 (7) TMI 124X X X X Extracts X X X X X X X X Extracts X X X X ..... terest earning activity being closely related to the construction activity, it is only proper that, the interest is adjusted towards the capital cost. He submitted that, he is supported by the Delhi High Court in Snam Progetti (S.P.A.) v. Addl. CIT [1981] 132 ITR 70. 3. Shri Ganesan submitted that there are few decisions of the High Courts directly on the point which are against the assessee and in that context the alternative plea of setting off the interest paid to the financial institutions for that period during which the funds remained invested in short term deposits, may be considered. He contended that, the statement of funds for the financial years December 1987, December 1988 and December 1989 show that, in the first year, the share capital as had been raised was fully invested in the capital assets. The finances having been raised from the second year only, it shows that the short term deposits are taken from out of the borrowed funds. He contended that, in the absence of any other finances being available and there being direct co-relation with the borrowed funds, to the extent of its utilisation in getting short term deposits, for the period of such deposits, the prop ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... earning of the interest. He supported his contention by referring to the decisions in CIT v. Sir Homi M. Mehta [1943] 11 ITR 142 (Bom.) and CIT v. Jagmohandas J. Kapadia [1966] 61 ITR 663 (Bom.). He referred to the Gujarat High Court decision in CIT v. Kasturbhai Lalbhai [1968] 70 ITR 267 and submitted that, without any nexus between the borrowal and the investment, interest on borrowal could not be deducted from the income on investment. He referred to the decision of the Madras High Court in Addl. CIT v. Madras Fertilizers Ltd. [1980] 122 ITR 139 and contended that, borrowal being on capital accounts the interest paid on such borrowal could not be deducted from the interest earned. He also relied on the decision of the Supreme Court in Smt. Padmavati Jaikrishna v. Addl. CIT [1987] 166 ITR 176. 7. The rival contentions have been very carefully considered. The plea of the assessee that the interest earned during construction is not income, in our view needs to be rejected because, it has no connection whatsoever with the construction activity. The decision of Patna High Court in CIT v. Bokaro Steel Ltd. No. 1 [1988] 170 ITR 522 is misplaced because in that case the assessee duri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tood invested in the capital assets and therefore, unavailable for making short term deposits. The above table also confirms the contention of the learned counsel that the borrowed funds were utilised in making the short term deposits. 10. The decisions of the Karnataka High Court and the Madras High Court were on the point of whether the interest that is to be capitalised should be net of interest paid and the interest earned on short term deposits, for which the answer provided was that, the interest that is related to the capital cost has to be grossed up and the interest earned is taxable as revenue income. It could be said that the alternative contention of the assessee is answered by the above decisions indirectly. 11. In the case of Seth R. Dalmia, the assessee had agreed to buy certain shares and to pay the consideration before a stipulated date, failing which he was to bear interest for the period of delay in making payment of the consideration, during which period, the bank was to receive the dividend, bonus shares on behalf of the assessee. The question that was considered was whether from the dividend income the assessee could be allowed interest paid to bank for th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... m for deduction of interest amounting to Rs. 2,04,744 was wrongly rejected by the income-tax authorities. 12. The Supreme Court in T.S. Krishna v. CIT [1973] 87 ITR 429 on which reliance had been placed by the departmental representative was considering allowability of wealth-tax payments as a deduction from dividend on shares, which shares were liable to wealth-tax. Since there was no link between the earning of the dividend and the liability on wealth-tax, they rejected the claim of the assessee. This case only emphasies the point that, there must be direct nexus between the earning of the income and the incurring of the expense and a mere remote connection is insufficient. 13. We shall reproduce section 12(2) of the Income-tax Act, 1922 and section 57(iii) of the Income-tax Act, 1961, to appreciate the difference if any, in the language of the sections as pleaded by the departmental representative : Section 12(2) of IT Act, 1922 Section 57(iii) of IT Act, 1961 Such income, profits and gains The income chargeable under the shall be computed after making head "Income from other sources" allowance for any expenditure (not shall be computed after making being in the nature o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s decision in our view, fully supports our above view that, borrowal must be for investment on only those assets, the income from which is liable to be taxed under section 56 of the Act. The continuing requirement of the section is that, the expenditure must be wholly and exclusively incurred for making or earning of income, which in our view suggests that, the expenditure must have direct nexus or connection with the earning or deriving of the income. This section in our view is not concerned with mere using of the funds that are borrowed, but, that the borrowal must be for investment on those assets, income from which are liable to be taxed under section 56 of the Act, under the head 'Income from other sources'. When the borrowal is for a different purpose and the terms of borrowal provide for payment of interest from the moment of giving of advance, the arrangement by the assessee unilaterally during the intervening period before its utilisation for construction purpose, does not in any way change the original nature of borrowal and its purpose. Since, the borrowal was towards construction and not for making of investment in such assets and for the purpose of making or earning ..... X X X X Extracts X X X X X X X X Extracts X X X X
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