TMI Blog1994 (12) TMI 44X X X X Extracts X X X X X X X X Extracts X X X X ..... on had not started. The total expenses incurred during the year amount to Rs. 83,32,473. The assessee had realised a sum of Rs. 3,14,366 as interest on short-term deposits of the funds not immediately required by the assessee. At the same time, the assessee had paid a sum of Rs. 58,51,595 as interest on funds borrowed by it for the purpose of its business. During the year, the assessee had received a sum of Rs. 2,742 from the sale of empty gunny bags. Out of the total expenses of Rs. 83,32,473 incurred during the year, the assessee treated a sum of Rs. 1,04,190 as an item which could not be capitalised. Out of the balance amount of Rs. 82,28,283, the assessee deducted the two items of income, viz., interest and miscellaneous income, amounting in all to Rs. 3,17,108 and capitalised the balance of Rs. 79,11,172. Hence, the assessee adjusted the income earned by it during the period of construction against its other expenses and took the net amount as the expense of construction. The Income-tax Officer held that the said two items of income amounting to Rs. 3,17,108 were assessable as the income of the assessee under the head " Income from other sources ". The Income-tax Officer, ac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tinct heads of income is attributable to the source of income from which the respective income is derived. Therefore, the income derived from a distinct source falling under the specific head has to be computed for the purposes of taxation in the manner provided by the appropriate sections. Section 56 contains provisions about the residuary head, viz., " Income from other sources ", and it does not come into operation until the preceding five heads mentioned above and contained in section 14 are excluded. As per 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 ", if it is not chargeable to income-tax under any of the heads specified in items 'A' to 'E' mentioned in section 14 of the Act. However, section 56 does not apply to income which is not includible in the total income of the assessee at all or to a receipt which cannot be considered as income of the assessee. The assessee, in the assessment year under consideration, had credited a sum of Rs. 3,14,366 as interest on call deposits with banks and a sum of Rs. 2,742 as " miscellaneous income ". It appear ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 pre-production period and income, if any, from lending transport vehicles to outsiders may be set off against the expenditure incurred in operating and maintaining these vehicles. Similarly, interest income earned during the construction period may be offset against interest expenses incurred during this period. " Mr. Jetley, learned counsel appearing for the Revenue, in support of his submission that the said amounts of Rs. 3,14,366 and Rs. 2,742 aggregating to Rs. 3,17,108 ought to be considered as income derived by the assessee from " Other sources " has placed reliance on the judgments of the various High Courts including the judgment of the Andhra Pradesh High Court in the case of CIT v. Derco Cooling Coils Ltd. [1992] 198 ITR 375. In that case, the Andhra Pradesh High Court has ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essment year concerned herein, it was still at the stage of construction. It had borrowed certain funds for setting up the plant. A part of the funds which were not immediately required was kept in deposit upon which some interest was earned. On the amounts borrowed by it, it was paying interest at a much larger figure. It, therefore, sought to deduct the interest earned by it from out of the interest paid by it and capitalised the balance interest paid. The Income-tax Officer, however, did not agree with this method. He treated the interest earned in a sum of Rs. 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 per ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... m other sources on the grounds : (i) that the interest paid by the assessee on borrowings was allowed as business expenditure and, therefore, those borrowings must have been used by the assessee for the purpose of its business ; (ii) it inferred from the said fact that the monies available for advancing loans, thus had or could have their sources in the assessee's own reserves and surpluses from the profits ; and (iii) that the advances were mostly to the assessee's subsidiary companies and its allied concerns. On the facts of the case, this court held that the assessee had not placed any material before the Departmental authorities or the Tribunal to show that the monies on which the interest in dispute was earned were advanced in the course of the assessee's business and that the Tribunal was justified in its conclusion and the income by way of interest received on loans and advances was taxable as income from other sources. The said decision has also no applicability to the facts of the present case. The ratio of the judgment in the case of Nagarjuna Steels Ltd. [1988] 171 ITR 663 (AP) squarely applies to the facts in the present case. The receipt of Rs. 2,742 by the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X
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