TMI Blog2005 (8) TMI 45X X X X Extracts X X X X X X X X Extracts X X X X ..... this court: "1. Whether on the facts and in the circumstances of the case, the hon'ble Member of the Income-tax Appellate Tribunal was justified in law in holding that the order of the Assessing Officer taxing the amount of interest and miscellaneous receipts, was erroneous and against law? 2. Whether on the facts and in the circumstances of the case, the hon'ble Income-tax Appellate Tribunal was legally correct in holding that the amount of interest and miscellaneous receipts were not exigible to tax at the hands of the assessee company as income from other sources?" The present reference relates to the assessment year 1988-89. Briefly stated the facts giving rise to the present reference are as follows: The company was incorporated in 1983 with the main object of setting up a fertiliser plant and manufacturing of fertilisers. During the year under consideration, the factory was under construction and no manufacturing activity had been undertaken. The assessee company received certain loans from the financial institutions with the stipulation that any interest earned on such amount of loan not utilised temporarily would go to reduce the liability of the loan. Due to cert ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of loan by the financial institutions a specific clause was incorporated in which it was stated that the interest earned on inter corporation/bank deposits, miscellaneous receipts will be taken into consideration for means of finance before making final disbursement for the project. Such cash accruals during project implementation will go to reduce institutional/bank loans. Relying upon the said clause he submitted that the amount of interest which the respondent-assessee had earned in special current account on the amount of loan advanced by the financial institutions have been kept was to go to reduce the loan and was to be taken into consideration for means of finance before making final disbursement and therefore, the interest accrued to the assessee was only to reduce the amount of loan and therefore, it could not be taxed under the head "Income from other sources". He heavily relied upon the following passage of the decision of the apex court in the case of Tuticorin Alkali Chemicals and Fertilizers Ltd. v. CIT reported in [1997] 227 ITR 172 wherein the apex court has held as follows: "There is another aspect of this matter. The company, in this case, is at liberty to use ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... no interest is paid by the bank. However, after negotiations the bank had paid interest amounting to Rs. 49,71,724. The assessee had other income from interest on various accounts. The total of all such interest amounted to Rs. 2,28,33,384. The letter dated December 13, 1986, written by the Industrial Development Bank of India which has been heavily relied on by the learned counsel for the assessee has not been referred to in the assessment year in question. The Tribunal has however, relied upon its earlier order dated June 26,1992, which related to the assessment years 1986-87 and 1987-88 in which the relevant clause of the aforementioned letter has been reproduced. For ready reference the said clause is reproduced below: "... we advise that the various earnings and receipts of the company during the implementation of the project, such as interest earned on inter corporation/bank deposits, miscellaneous receipts will be taken into consideration for means of finance before making final disbursement for the project. Such cash accruals during project implementation will go to reduce institutional/bank loans." From a reading of the aforesaid clause it appears that the financial i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fall. Thus income has been likened pictorially to the fruit of a tree, or the crop of a field. It is essentially the produce of something which is often loosely spoken of as "capital".' In other words, if the capital of a company is fruitfully utilised instead of keeping it idle, the income thus generated will be of revenue nature and not an accretion to capital. Whether the company raised the capital by issue of shares or debentures or by borrowing, will not make any difference to this principle. If borrowed capital is used for the purpose of earning income, that income will have to be taxed in accordance with law. Income is something which flows from the property. Something received in place of the property will be capital receipt. The amount of interest received by the company flows from its investments and is its income and is clearly taxable even though the interest amount is earned by utilizing borrowed capital. It is true that the company will have to pay interest on the money borrowed by it. But that cannot be a ground for exemption of interest earned by the company by utilizing the borrowed funds as its income. It was rightly pointed out in the case of Kedar Narain Sin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... annot be allowed as deduction nor can it be adjusted against any other income under any other head. Similarly, any income from a non-business source cannot be set off against the liability to pay interest on funds borrowed for the purpose of purchase of plant and machinery even before commencement of the business of the assessee. It has been argued that the source from which the company has earned interest is borrowed capital. The company has to pay interest to its creditors on the same borrowed capital. Having regard to the identity of the fund on which interest is earned and interest is payable, the company should be allowed to set off its income against interest payable by it on the same fund. We are of the view that no adjustment can be allowed except in accordance with the provisions of the Income-tax Act. However, desirable it may be from the point of view of equity, this adjustment cannot be made unless the law specifically permits such adjustment." Thus the plea that the interest earned by the assessee on such loan is to be set off against the interest payable on loan given for the purpose of construction cannot be accepted. So far as the plea that the assessee was not ..... X X X X Extracts X X X X X X X X Extracts X X X X
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