TMI Blog1982 (1) TMI 112X X X X Extracts X X X X X X X X Extracts X X X X ..... t time as on 31-10-1978. It is common ground that during the entire year the company was engaged in the process of erection of its plants and machinery and construction of the factory. The assessee received an amount of Rs. 25,532 as interest from State Bank of India and two sister concerns. It also incurred an interest obligation of Rs. 2,666 on its loan to the extent of Rs. 1 lakh from State Bank of India. It is not in dispute that the interest receipt was from advances made out of paid-up capital amounts. The assessee filed a nil return and contended that the interest receipt had been credited to pre-operative expenses account and that it should be treated as reduction in the project cost and not income in the ordinary sense of the word. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... copy of which was filed). Our attention was also drawn to the recent decision of the Special Bench of the Tribunal at Hyderabad on the same issue in IT Appeal No. 15 (Hyd.) of 1980 dated 28-10-1981, to which one of us (Vice-President) was a party. The learned counsel also placed heavy reliance on the decision of the Supreme Court in the case of Challapalli Sugars Ltd. v. CIT [1975] 98 ITR 167. 5. The learned departmental representative submitted that the decision of the Special Bench at Hyderabad would require reconsideration. He claimed that the accounting practice authorised by the Institute of Chartered Accountants cannot decide the issue as to whether the receipt has the character of income or not. He pointed out that Madras High Cou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er was yet to commence. The funds were deposited with the Bank and parties pending their utilisation in construction of factory and erection of plants. The assessee has treated the receipt by way of interest as an amount which goes to reduce the project cost. Such a treatment is warranted by accounting practice as pointed out with reference to the publication of a professional body relating to accountancy. The Supreme Court in the case of Challapalli Sugars Ltd. referred to various text books of accountancy and the Statement on auditing practices issued by the Institute of Chartered Accountants of India as relevant for accepting the assessee's plea in that case that interest paid on amount borrowed for acquiring and installing machinery and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ds interest received, it is only the net interest that is reckoned as capital cost. Interest receipt which goes to partially off set the interest payment cannot be considered as income. It can only be an abatement of cost. Could the treatment be different merely because the interest receipt happens to be larger than interest payment as it happens in this, assessee's case for this year ? Hence, the allowance of the assessee's claim in this case could be no more than mere application of the accepted accountancy rule approved in the decision of Challapalli Sugars Ltd. The accountancy principle regarding capitalisation of interest payment is no different from the accountancy principle enabling the interest receipt to be treated as reduction in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ese interest receipts are in the course of entrustment of safe custody of funds to bank, while awaiting use in the capital project. 10. Section 56 of the Act authorises assessment under other sources of income of every kind which is not chargeable under any of other heads specified in section 14 of the Act. Neither the definition of "income" under section 2(24) of the Act nor any of the items listed under section 56(2) nor any of the deeming provisions of the Act stipulate that interest in every case must be income though it is ordinarily so because interest is ordinarily a "flow" from source "fund". It is not so in this case as there is no expected regular flow. No doubt, section 2(24) is only an inclusive definition. But even ordinary c ..... X X X X Extracts X X X X X X X X Extracts X X X X
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