TMI Blog1981 (6) TMI 68X X X X Extracts X X X X X X X X Extracts X X X X ..... ce sheet, were contained in Schedule 'E'. Schedule 'E' gave the expenditure incurred right from 29-7-1974, i. e., the date of incorporation, to 30-6-1976, and which remained unadjusted. These details were given in Annexure which formed part of the balance sheet as at 30-6-1976. The aggregate unadjusted expenditure came to Rs. 30,13,628 which included the opening balance, as on 1-7-1975 of Rs. 7,87,256. Against the amount of Rs. 30,13,628 in the Annexure, two items were shown as deductions, viz., Miscellaneous receipts : Rs. 4,900 and Interest received : Rs. 15,092 arriving at a net balance of Rs, 29,93,636. 4. The assessee, in filing the return for the assessment year 1977-78, showed the total income at nil and gave an accompanying computation as under : "Income from business : The company is still under construction stage and has yet to commence production. The expenses incurred during construction period, pending allocation to capital account, are detailed in the notes attached to the balance sheet as at 30-6-1976. The interest income received by the company is being treated as part of the business income, pursuant to one of the objects for which the company is established. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o deduction was permissible. Even so, considering the fact that the assessee required establishment, etc., to be maintained and some expenditure was necessary to earn the income, he allowed a deduction in round figures of Rs. 4,000. Thus, the income stood computed at Rs. 15,990. 6. The assessee appealed to the Tribunal and it was contended in the grounds of appeal that the Commissioner (Appeals) erred in treating the interest earned as assessable under section 57. According to the assessee, the Commissioner failed to note that the money invested in deposits was out of borrowed funds of the business on which the assessee was obliged to pay much higher rates and there was, therefore, a nexus between interest earned and interest paid and consequently, it was pleaded, appropriate relief may be allowed. 7. When this appeal came up for hearing, the members constituting the Bench were of the view that the matter should be placed before the President of the Tribunal with the request that a Special Bench should be convened, stating that in IT Appeal No. 1692 (Hyd.) of 1979, dated 15-9-1980 in the case of East Coast Salt Chemicals Ltd., for the assessment year 1977-78, the Tribunal had ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... In this regard he submitted that the Bench considered the principles of accountancy as published in a brochure by the Institute of Chartered Accountants of India on this aspect in coming to the conclusion that it did, According to him, the conclusion arrived at by the Tribunal was unexceptionable. 9. The learned counsel submitted that the facts in IT Appeal No. 464 (Hyd.) of 1980 were distinguishable, because interest receipts in that case were on deposit of share capital and interest payments were on borrowed moneys which were utilised wholly and exclusively for constructing the factory. He also stated that the Tribunal in that case had relied on the decision of the Calcutta High Court in New Central Jute Mills which was a case where the assessee had claimed the excess payment of interest as a revenue deduction, and that in the decision of the Madras High Court in Addl. CIT v. Madras Fertilisers Ltd. [1980] 122 ITR 139 the position was similar, and hence the ratio of these decisions was also not applicable. 10. Finally, reference was made in extenso to the notes prepared by the Institute of Chartered Accountants of India on 'Study on expenditure during construction period', t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... referred to the following extract from the notes prepared by the Institute of Chartered Accountants of India on 'Study on expenditure during construction period' : "17. 11 During the construction period, a project may earn some income from miscellaneous sources, for example, share transfer fees, interest income, income from hire of equipment or assets, and income from sale of products manufactured during the period of test runs and experimental production. It is recommended that such income should be offset against the related item of expenditure so that only the net amount of expenditure is capitalised or treated as deferred revenue expenditure, as the case may be. In either case, consideration may have to be given to the question of providing for the income-tax liability on such income. (Paragraph 8)". [Emphasis supplied by us.] With reference to the portion aforesaid on which we have placed emphasis he stated that the Institute itself had pointed out that consideration had to be given to the question of providing for income-tax liability in respect of the income. Therefore, his contention was that the procedure described by the Institute did not militate against his stand, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to the contrary." What would be the expenditure necessary to bring the assets into existence is a matter of detail again, with which we are not concerned, in the present case, since there is no adjudication on the same by the authorities below. As a general proposition, if in appropriate cases interest incurred before commencement of production on borrowed funds can be capitalised, then, if the assessee can bring about a reduction in the total quantum of expenditure, it would follow that only the lesser amount of interest can be considered for purposes of capitalisation. In the present case, the assessee had borrowed funds. Some of the borrowed funds which were not immediately required were kept by the assessee in deposits and some interest was earned. There was a direct nexus between the borrowed funds and the deposited funds since the deposited funds came out of the borrowed funds. It is, therefore, clear that on the facts of the present case, receipts and payment of interest have to be considered in a single account. Therefore, the receipts of interest would go to reduce the payment of interest. As we have already pointed out, interest payments were to the extent of Rs. 7,94, ..... X X X X Extracts X X X X X X X X Extracts X X X X
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