TMI Blog1996 (7) TMI 59X X X X Extracts X X X X X X X X Extracts X X X X ..... pment Bank of India Ltd., Bombay, an amount of rupees three crores which was left in deposit with the State Bank of Travancore, till the assessee found it necessary to use the said amount either in the purchase of plant and machinery or in installing them or in running its establishment. Some portion of this amount was also deposited with the Chartered Bank, Cochin. With the help of the bank, the assessee became a member of the bill market which fetched considerable income in the accounting year. Various such deposits earned income by way of interest in regard to which an amount of Rs. 5,05,711 got accumulated along with the above deposits which were borrowed as stated above by the assessee from the Development Bank. It needs to be mentioned that the amounts of borrowings received from the Industrial Development Bank of India for which there was no immediate necessity were kept in deposit with the above banks in this State and in regard thereto the assessee had taken the specific approval of the Industrial Development Bank of India to have the unutilised money left with the assessee in the bank account for the purpose of its use in the bill market. Naturally, such deposits earned ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd machinery form part of the "actual cost", it is observed that where any amount is paid or is payable as interest in connection with the acquisition of an asset, so much of such amount as is relatable to any period after such asset is first put to use shall not be included in the actual cost of such asset. The Income-tax Officer further observed, referring to the situation with effect from April 1, 1984, vide the Finance Act, 1986, that the interest up to the stage when the asset is first put to use has to be considered as part of the "actual cost" within the meaning of section 43(1) of the Act. Proceeding with the reasoning in this fashion, it is observed further that the interest received by the assessee during the year in question cannot be set off against the interest payable to the Industrial Development Bank of India. The Income-tax Officer took the view that the amount of loan obtained on interest from the Government for erection of the industry if kept in deposit with the bank till the utilisation for stipulated purpose and interest was earned thereon, it will have to be considered as an income relatable to "Other sources" and would become liable to tax and no deduction c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Bank of India, with their approval. " It is this undisputed factual matrix that is taken up for consideration by the Tribunal which ultimately answered the question in favour of the assessee that the amount could not be considered in any way as income from "Other sources" and in regard thereto deduction in terms of section 57(iii) of the Income-tax Act, 1961, would have to be granted. In the process of this reasoning, the Tribunal has taken up for consideration obviously the decision of this court in Traco Cable Co. Ltd. v. CIT [1969] 72 ITR 503 (Ker). The Tribunal has observed with reference to the above decision that the dispute was in respect of Rs. 34,139 claimed by the assessee as business expenditure which was disallowed by the departmental authorities on the ground that there was no business income against which it could be allowed. The Tribunal has held that in the context of the undisputed factual matrix, the decision could not be said to be against the assessee. Thereafter, as stated at the outset, the Tribunal has observed that the decisions of the High Courts present a situation of a sharp cleavage of judicial opinion in regard to the question as to whether the i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as distinct from the strength or weakness of a judicial precedent under the theory of precedence. It is not permissible to bypass the decision of the apex court with the observation that the apex court was dealing with almost the other side of the coin of a two-sided question. Challapalli Sugars Ltd.'s case [1975] 98 ITR 167 (SC), considered the question relating to the problem of deduction, depreciation and development rebate in the matter of the question of knowing as to what is to be understood as "actual cost" in regard thereto. The judgment of the apex court rendered by justice Khanna considered the question with manifold aspects in regard thereto. Copious references to the standard treatises not only on the first principles of accounting, but also advanced accounting, relevant provisions of the Companies Act, 1956 (especially section 208 thereof), together with decided cases not only of the apex court, but also of English cases will find adorning the reasoning recording conclusions in regard thereto. In the process it is available as found out as to what the first principles of accountancy understand by the term "cost". It is observed that the word is not synonymous with ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al cost" has not been defined in the Act and, therefore, whether the interest paid before the commencement of production on the amount borrowed for the acquisition and installation of the plant and machinery can be considered to be part of the actual cost of the assets to the assessee requires an understanding in the context, meaning thereby whether it is to be understood as carrying the attributes of price or carrying the attributes of its annexation with cost of construction. As an aid in the process, reference is also made to the literature captioned "Statement on Auditing Practices" circulated by the Institute of Chartered Accountants of India (1974) is also valuably sought to know what comprises "fixed assets" and observes in connection therewith that cost includes all expenditure necessary to bring the assets into existence and to put them in working condition. Emphasis is given where this inclusive character is illustrated stating it to include "interest on borrowings to the extent specified in paragraph 2.22" of the above statement. Reference to the said paragraph 2.22 also is found to record the accepted view that in the case of a newly started company which is in the pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nnection with what is understood as "cost" and "actual cost" which is required to be determined. For our purposes to understand the head "Income from other sources" with regard to the claim for deduction, it is important to emphasise that such head in accordance with the provisions of section 57 of the Act has to be computed after making the deductions specified therein. Section 57(iii) also provides an aid to what is its connection with the characteristics of income in regard to the category under consideration. Section 57(iii) is as follows : "57. Deductions.--The income chargeable under the head 'Income from other sources' shall be computed after making the following deductions, namely :--. . . (iii) any other expenditure (not being in the nature of capital expenditure) laid out or expended wholly and exclusively for the purpose of making or earning such income." It means that any expenditure laid out or expended wholly or exclusively for the purpose of making or earning such income is deductible and the exception is of capital expenditure in the context. In spite of this situation, we must record that at least three High Courts have considered the situation otherwise. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... roposition, the Calcutta High Court did not allow deduction as claimed by the assessee in regard to the amount of interest. The decision of the Calcutta High Court is centered round its own factual matrix, although there is a reference to the above decision of the apex court. The Tribunal has relied on the decision of the Andhra Pradesh High Court in CIT v. Nagarjuna Steels Ltd. [1988] 171 ITR 663, dealing with the situation of a plant under construction and surplus of the borrowed amount kept in short-term deposits by the assessee on his own. The Andhra Pradesh High Court has independently ruled that where the object of the assessee is to do business and in the course of setting up a plant for the purpose, in a situation that all borrowed money is not required at once, thought of keeping such surplus funds in short-term deposits and interest is earned in the process of such short-term deposits, with regard thereto, the amount would have to be set off against the interest paid or payable by the assessee on his borrowings leaving the balance, if any, for getting income with the process of capitalisation. Learned senior standing counsel for the Revenue showed us the decision of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y concerned (sic), there is a reference to Challapalli Sugars Ltd.'s case [1975] 98 ITR 167, it has to be stated that neither the first appellate authority nor the Tribunal has taken the trouble to read and appreciate the decision of the apex court, in which case the situation would have been quite contrary and the authorities would not have been found to be clustered in the so-called judicial cleavage. Even in the statement of case the decision of the apex court is conspicuous by its absence. It is unnecessary, but, as we have emphasised at the outset the weightage of the decision of the apex court, it is disheartening that the said decision, we are afraid, has not been referred to satisfactorily in the decisions placed for our consideration, some of which have been referred to by us. Much judicial time could have been avoided had this been done which is essential in constitutional law. For the above reasons, the question is answered in the affirmative, against the Revenue and in favour of the assessee. A copy of this judgment under the seal of the court and the signature of the Registrar shall be forwarded to the Income-tax Appellate Tribunal, Cochin Bench, as required by law ..... X X X X Extracts X X X X X X X X Extracts X X X X
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