TMI Blog1987 (11) TMI 374X X X X Extracts X X X X X X X X Extracts X X X X ..... 77-78. The assessee-company was incorporated on July 19, 1974. The main objects of the company were to own and acquire ferrous and non-ferrous metal melting furnaces, rolling mills and to carry on business as traders and manufacturers of ferrous and non-ferrous metal ingots, etc., and to do business of traders or manufacturers of steel products and hardware of all kinds, and also to act as stockists, commission agents, etc., for engineering and industrial requirements. In the return filed by the assessee for the assessment year 1977-78, it showed its total income as nil and gave the following computation of its income I. Income from business : R R 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 establishe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by it and capitalise the balance interest paid. The Income-tax Officer, however, did not agree with this method. He treated the interest earned in a sum of ₹ 15,092 as income from other sources and held that no amount is deductible therefrom as none was expended wholly and exclusively for earning the said interest amount. In short, he treated the said amount as income of the said year, refusing to allow it to be deducted from the interest paid by the assessee during the relevant assessment year. On appeal, the, Commissioner (Appeals) affirmed the order of the Income-tax Officer. On further appeal, however, the Tribunal took a different view. Relying upon the notes prepared by the Institute of Chartered Accountants of India on A study on expenditure during construction period , the Tribunal held that the proper method to be adopted in such cases is not to treat the said interest amount of ₹ 15,092 as income from other sources, but to treat the same, as also the interest paid by the assessee on the loans obtained by it, as one single account. This is what the Tribunal said : It is, therefore, clear that on the facts of the present case, receipts ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d. Such income may be earned by way of share transfer fees or by way of interest from the temporary investment of surplus funds prior to their utilisation for capital or other expenditure. 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, from lending transport vehicles to outsiders may be set off against the expenditure incurred in operating and maintaining those vehicles. Similarly, interest income earned during the construction period may be off-set against interest expenses incurred during this period ... . In our opinion, the course indicated by the Institute of Chartered Accountants of India is the proper one to be adopted in such circumstances. Indeed, a somewhat similar case had arisen before us in R. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... setting up a heavy chemical plant, and during the accounting year relevant to the assessment year 1958-59, the plant was under erection. Earlier in 1955, the assessee had obtained from the Government of Uttar Pradesh a loan of ₹ 1,45 crores for the purpose of setting up the said plant. The amounts received towards loan were kept in deposit with a bank till their transfer or utilisation for the stipulated purpose. During the relevant assessment year, the assessee earned a sum of ₹ 1,75,471 as interest on such deposits, while during the same period it paid to the Government U. P. a sum of ₹ 9,54,588 as interest. The assessee, since it was an existing company and already engaged in another business, claimed the difference between the interest earned and interest paid, i.e., ₹ 7,79,117, as revenue expenditure, which was disallowed by the Income-tax Officer on the ground that the expenditure had nothing to do with the existing business of the assessee, but related to a separate unit altogether which was still under erection. The Appellate Assistant Commissioner affirmed the said view. On further appeal, the Tribunal held that the amount paid by way of interest s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e similar ; it was found as a fact that the interest paid on foreign exchange loan and the interest earned on bank deposits were not inter-connected or inter-dependent. Accordingly, it was held that under section 57(iii), the interest paid cannot be set off against, the interest received. In our opinion, the finding that there was no connection or nexus between the transactions is the distinguishing factor. Learned standing counsel for the Revenue then relied upon the decision of the Madras High Court in Addl. CIT v. Madras Fertilisers Ltd. [1980] 122 ITR 139. The facts of this case too are again somewhat similar. But here too, a finding was recorded that there was no direct connection between the interest paid and the interest received. This finding again, in our opinion, is a distinguishing factor. On the other hand, learned counsel for the assessee relied upon a decision of the Delhi High Court in Snam Progetti S. P. A. v. Addl. CIT [1981] 132 ITR 70. In this case, Snam Progetti, an Italian company carrying on business as engineers and contractors in the field of petroleum and petrochemical plants, was engaged in India having huge contracts, each running into millions of d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hortterm deposits within the meaning of section 57(iii) ? The facts of this case are similar to the facts in R. C. No. 315 of 1982. Though the question referred is squarely based upon section 57(iii), the finding of the Tribunal is that during the relevant assessment years, the assessee was engaged in setting up its plant and unit and that part of the amount borrowed by it from Andhra Pradesh Industrial Development Corporation was kept in short-term deposits with banks, whereon it gained some interest. The Tribunal disagreed with the departmental authorities that the said interest income should be treated as income from other sources . It was of the opinion that the payment of interest on the loans obtained by the assessee and earning of interest on shortterm deposits made by it out of the amounts borrowed must be treated as a single transaction. On the above finding, we are of the opinion that the question referred does not really arise, because the interest income earned cannot be treated as income from other sources. As held by us in R. C. No. 315 of 1982, the said interest income has to be set off against the interest paid by the assessee during the relevant assessment ..... X X X X Extracts X X X X X X X X Extracts X X X X
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