TMI Blog1997 (7) TMI 56X X X X Extracts X X X X X X X X Extracts X X X X ..... 1976-77 and Rs. 31,000 on account of letter of credit charges and Rs. 75,606 as interest paid on overdraft for the assessment year 1977-78 from interest income? 4. Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that exemption under section 80P(2)(c) was not allowable as the assessee did not have any income from business?" Questions Nos. 1 and 2 : The assessee is a co-operative society running a sugar mill. A return for the assessment year 1976-77 (year ending June 30, 1975) was filed declaring loss amounting to Rs. 7,29,700 under the head "Business". For the next assessment year, the assessee declared loss of Rs. 20,19,450. The assessee's factory had not commenced production either during the assessment year 1976-77 or the next year 1977-78. Sugar production had started from January 1, 1977. Loss in both the years was shown on account of various expenses incurred in connection with the setting up of the factory. The Assessing Officer, during the course of assessment for the assessment year 1976-77, noticed that a sum of Rs. 1,60,778 had been received by the assessee-company by way of interest on certain fixed deposits. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... are not treated to be activities concerning the main objects, the income earned by way of interest should go to reduce the cost of assets acquired, in the same manner as the expenditure has been allowed to be capitalised. The objects of the assessee-society have been specified in its bye-laws. The main object of the society is to set up a sugar factory as has been specified in clause (a) of the "objects". In clause (b), special emphasis was made by Sh. Mukhi on clauses (ii) and (vii), which read as under : "(ii) To raise loan from Industrial Finance Corporation/Industrial Development Bank for investment in block assets and allied purposes. (vii) To undertake measures for development of sugarcane including supply of seed, manure, implements, irrigation and other production requisites provision of technical advice regarding improved cultivation practices." The assessee-company had raised loans from various sources and certain measures for the development of sugarcane had also been undertaken. Since these activities have been specified in the bye-laws under the head "objects", the raising of loans and the purchase of machine by opening a letter of credit should be treated to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... It was held that the money received by way of grant-in-aid was not a business income nor a business receipt but it was a receipt of a casual and non-recurring nature. The nature of income was, therefore, basically different in the hands of the assessee in that case and, therefore, the decision of the Delhi High Court is found to be not relevant to the facts of the case in hand. In Addl. CIT v. Indian Drugs and Pharmaceuticals Ltd. [1983] 141 ITR 134, the Delhi High Court had again an occasion to examine a question relating to certain receipts. In that case also, the business had not been set up and none of the units of the assessee had commenced production. The assessee had received a sum of Rs. 40,540 by the supply of tender forms regarding construction and erection of plant. A sum of Rs. 28,241 was received from the sale of grass, trees, etc., and another sum of Rs. 17,818 from the sale of stones and boulders. Another sum of Rs. 76,201 was realised by supplying water and electricity to the contractors constructing the factory. The Assessing Officer took the view that the sums of Rs. 40,540, Rs. 28,241 and Rs. 17,818 were the assessee's income assessable under the head "Income f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rom other sources". However, the Commissioner of Income-tax agreed with the contention of the assessee in appeal and took the view that the income arose in the course of business carried by the assessee and not from any separate source of income. The Commissioner, therefore, accepted the adjustment as made by the assessee in its account. The Tribunal also upheld the decision of the Commissioner, after noticing that the treatment given by the assessee to the said two items of income was in accordance with the principles laid down by the Institute of Chartered Accountants of India, which was a recognised authority on accounting principles. The view taken by the Tribunal was affirmed by the High Court and it was held that the whole arrangement of obtaining the finance and its temporary utilisation formed one composite transaction and, as such, the interest received by the assessee on account of temporary utilisation of the loans could not be considered in isolation. Therefore, the income derived by the assessee could not be assessed as income from other sources. A question arose before the Supreme Court as to whether underwriting commission received by the assessee should be taken t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and upheld the view taken by the Tribunal. It was noticed that the commission earned by the assessee as underwriter in respect of the shares offered by the company and purchased by the public would undoubtedly be the profit of the assessee to be accounted for in its profit and loss account. However, the amount of underwriting commission and brokerage received by the assessee on the shares purchased by it would go to reduce the value of the shares and could not be considered as the income of the assessee. Shri R. P. Sawhney, learned senior counsel for the Department, has argued that the income earned by the assessee by way of interest was in the nature of income from other sources and could not go to reduce the cost of the asset. So far as expenditures are concerned, those have been capitalised by the assessee and rightly so. It is pointed out that the assessee had deposited money with the bank out of its share capital and not from the borrowed funds. It is a finding of fact given by the Tribunal that money had been deposited out of the share capital. It is, therefore, argued by Shri Sawhney that whatever interest income was earned, that was out of the unutilised share capital mo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... has also held that interest earned on certain deposits kept with the bank was assessable under the head "Other sources". The assessee had obtained from the Government a certain loan for the purpose of setting up of the plant. The amount received under the loan had been kept in deposit with the bank pursuant to the terms of agreement. The assessee had also paid to the Government a certain amount as interest. The difference between the interest earned and the interest paid was claimed by the assessee as revenue expenditure. The Income-tax Officer disallowed the claim on the ground that the expenditure had nothing to do with the existing business of the assessee and related to a separate unit which was still under erection. It was found that the specifically earmarked loan had been utilised for the purchase of machinery and that the payment was in the nature of capital expenditure. It was noticed that the assessee had not established that the expenditure was incurred solely and wholly for the purpose of earning interest from the bank. The interest paid to the Government was allowed to be capitalised and added to the cost of the plant. The Andhra Pradesh High Court in CIT v. Derco Co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... part of the "actual cost" of the asset. Such interest was not allowed as deduction in computing the income of the assessee. The Delhi High Court in CIT v. Modi Rubber Ltd. [1994] 208 ITR 379, has also taken a view that the interest on deposits cannot be capitalised and is taxable as income from other sources. There also, the assessee was in the process of setting up its factory and had not come into business. The share capital was invested in the fixed deposits in the banks to earn income. The interest income so earned was not related to the activity of the assessee of construction of the factory as such. It was observed that the activity of depositing the surplus funds out of the share capital could not be said to be incidental to the construction of the factory. Interest income from the bank deposits accrued or arose out of an independent source during a period when the business had neither been set up nor commenced. Interest income was, therefore, held to be assessable to tax under the head "Income from other sources". The Rajasthan High Court has also treated interest earned on deposits, to be assessable as income from other sources in two cases, namely : (i) CIT v. Rajasth ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the contract for acquiring a business asset should go to reduce the cost of the asset. As has been seen the Supreme Court in CIT v. U. P. State Industrial Development Corporation [1997] 225 ITR 703 took notice of the activity of underwriting shares and the earning of the underwriting commission and brokerage from such activity. It was held that as the underwriting commission had been earned by the assessee in the course of taking over certain shares, such commission shall go to reduce the cost of the shares acquired by the assessee and could not be taken into the profit and loss account. Since, the assessee had subscribed certain shares out of the underwritten shares, the commission relating to those shares went towards the cost and no income was earned by the underwriter. Following the ratio laid down by the Supreme Court in CIT v. U. P. State Industrial Development Corporation [1997] 225 ITR 703, it has to be concluded, in the present case, that the interest income earned by the assessee was directly relatable to the activity of acquiring an asset from a supplier in whose favour a letter of credit was opened after paying money in fixed deposits. Since, the two activities, nam ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he income from other sources. A similar view has been taken by the Patna High Court as well as the Rajasthan High Court in CIT v. Bihar Alloy Steels Ltd. [1994] 206 ITR 350 and CIT v. Manglam Cement Ltd. [1996] 217 ITR 369, respectively. The Karnataka High Court in Karnataka Forest Plantations Corporation Limited v. CIT [1985] 156 ITR 275, has also examined the question of deductibility of expenditure from the interest income. It was held that interest payable on the borrowings was not deductible under section 57(iii) of the Act, because borrowings were not made to make investments and earn interest from them. The Gauhati High Court has also taken a similar view in CIT v. Assam Plantation Crops Development Corporation Ltd. [1996] 221 ITR 392. It has been observed that deduction was permissible from income under section 57 of the Act only if it was incurred wholly and exclusively for earning the interest income. The Supreme Court has, in Challapalli Sugars Ltd. v. CIT [1975] 98 ITR 167, laid down that interest paid before the commencement of production on the amounts borrowed for the acquisition and installation of plant forms part of the "actual cost" of the assets. The assesse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fore, whatever activities had been undertaken, those were pre-operative activities. In this view of the matter, the application of clause (c) was found wholly inappropriate by the Commissioner as well as the Tribunal. If the income is earned out of an activity of the society, then a deduction of Rs. 20,000 is admissible under sub-clause (ii) of clause (c). The assessee had not yet commenced business or production of sugar and, therefore, the pre-operative activity could not make it eligible to claim deduction under sub-clause (ii) of clause (c) of sub-section (2) of section 80P of the Act. Shri Mukhi, learned counsel for the assessee, has placed reliance on a decision of the Supreme Court in Broach Distt. Co-operative Cotton Sales, Ginning and Pressing Society Ltd. v. CIT [1989] 177 ITR 418. That was a case where exemption has been sought under section 81(1)(c) of the Act. That decision is, therefore, distinguishable on facts and is not applicable to the controversy arising here. In the result, the withdrawal of deduction by the Commissioner and the Tribunal is upheld. The assessee is held to be not entitled to the deduction under section 80P(2)(c) of the Act. Question No. 4 is ..... X X X X Extracts X X X X X X X X Extracts X X X X
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