TMI Blog1996 (5) TMI 73X X X X Extracts X X X X X X X X Extracts X X X X ..... in rubber, coffee and onion plantations in different parts of the State. The entire share capital was held by the State Government. Investments were made for the plantation. The Assessing Officer found that the assessee obtained revenue receipts from the interest on fixed deposits which were liable to tax. Revenue receipts included nominal sale of Rs. 14,042 for coffee plants sold to the Nagaland Government. The assessee had shown net loss in the profit and loss account for Rs. 7,76,502 and transferred 90 per cent. of the same to the capital account and the rest was claimed as revenue loss for the year. The Income-tax Officer in the order of the assessment year 1976-77 found that the interest received was Rs. 2,43,970 on fixed deposits. According to the Income-tax Officer, the amount was not connected with any business of the assessee. The net loss return was not, therefore, accepted. The Income-tax Officer allowed deduction of ten per cent. of the expenses for earning the interest income. For the assessment year 1977-78, the Assessing Officer gave a similar order. He, therefore, computed the income of the assessee in respect of the interest from fixed deposits at Rs. 51,855 as p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s therefore not accepted. The Income-tax Officer accordingly allowed ten per cent. as reasonable expenditure for earning the income. He took Rs. 2,19,570 as income of the assessee from other sources for the assessment year 1976-77 and for other years subsequent to the assessment year 1976-77, the Income-tax Officer assessed in a similar manner and added a similar income from the bank deposits as income of the assessee from other sources. The contention of learned counsel for the Revenue is that the Tribunal erred in law and on the facts in holding that the interest received from fixed deposits of the assessee was not taxable in the hands of the assessee as income from other sources. Learned counsel further contended that the Inspecting Assistant Commissioner of Income-tax in this regard had issued instructions under section 144B that the assessee had been carrying on some business during the said year though in a limited scale. The sale of plants and crops was definitely a part of the business activities as envisaged by the memorandum and articles of association of the assessee-company and the interest income derived from the fixed deposit made by the assessee was an income of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d from payment of income-tax under section 10 shall be liable for payment of income-tax. Interest is undoubtedly an income and section 10 does not exempt payment of income-tax on interest. The income which does not come under items A to E falls under item F of section 14 of the Act, i.e., " Income from other sources ". Under section 56, income of every kind which is not to be excluded from the total income under the Act shall be chargeable to income-tax under the head " Income from other sources ". Now, the question is whether interest accrued on an amount ear-marked for construction of a building or for plantation, not utilised for a certain period but kept in the fixed deposit shall be treated as " Income from other sources ". The accountancy principle had been enunciated in the booklet " Study on Expenditure during Construction Period ", published by the Institute of Chartered Accountants of India. In the 1982, Reprint Edition of this booklet, at paragraph 8, it was stated as follows : 8. Income during the construction or pre-production period : 8.1. It is possible that a new project may earn some income from miscellaneous sources during its construction or pre-production ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hallapalli Sugars Ltd. v. CIT [1975] 98 ITR 167, the Supreme Court had the occasion to consider this aspect of the matter. The question that arose in that case was whether interest paid before the commencement of production on amounts borrowed by the assessee for the acquisition and installation of plant and machinery would form part of the " actual cost " of the assets to the assessee within the meaning of the expression in section 10(5) of the Indian Income-tax Act, 1922, and whether the assessee would be entitled to depreciation allowances and development rebate with reference to such interest also. The Supreme Court noticed the Statement on Auditing Practices issued by the Institute of Chartered Accountants of India and Higher Book-keeping and Accounts by Cropper Morris and Fison, seventh edition, and held that the accepted accountancy rule for determining the cost of fixed assets was to include all expenditure necessary to bring such assets into existence and to put them in working condition. In case money was borrowed by a newly started company which was in the process of constructing and erecting its plant, the interest incurred before the commencement of production on such ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ple laid down by the Institute of Chartered Accountants of India nor the reasoning contained in the decision of the Supreme Court in Challapalli Sugars' case [1975] 98 ITR 167 and of this court in Nagarjuna Steels' case [1988] 171 ITR 663 would \merit the accept ance of the assessee's contention in this behalf .... However, in our view, the last sentence in paragraph 8.2 shall not be read in isolation but in the context of and in conjunction with the preceding sentences. If so read, it is doubtful whether the Research Committee of the Chartered Accountants of India meant to lay down a broad proposition that every receipt of interest during the pre-production period should be linked with interest payment so as to be reflected in the actual capital cost of the assets. The above passage at paragraph 8.2 can be better understood by referring to the ' Summary of Conclusions ' recorded at paragraph 17.11 of the same booklet which reads as follows : ' 17.11. During the construction period, a project may earn income from miscellaneous sources---for example, share transfer fees, interest income, income from hire of equipment or assets, and income from sale of products manufactured during ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... est received should be capitalised. Interest earned by the assessee on investment of share capital in call deposits could be assessed separately under the head " Income from other sources ". In Traco Cable Co. Ltd. v. CIT [1969] 72 ITR 503, the Kerala High Court also held that in case where business had not commenced and the amounts were not immediately required for any business, the receipt of income by interest was only incidental or consequential on the deposit. It was in the business which was carried on by the company in respect of deposit of share capital and the expenditure was not incurred for the purpose of making or earning interest received by the company on the deposit of the share capital. Section 56 of the Act envisages that income of every kind which is not to be excluded from the total income under the Act shall be chargeable to income-tax under the head " Income from other sources ", if it is not chargeable to income-tax under any of the heads specified in section 14, items A to E. Section 57 of the Act provides for deduction from income which is chargeable under the head " Income from other sources ". The amount which has been received by way of interest on ..... X X X X Extracts X X X X X X X X Extracts X X X X
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