TMI Blog1994 (3) TMI 70X X X X Extracts X X X X X X X X Extracts X X X X ..... in banks on which interest of Rs. 3,21,679 was earned. The assessee claimed before the Income-tax Officer that the said interest income was not assessable and that out of the expenditure of Rs. 21.61 lakhs, expenditure of Rs. 4 lakhs should be set off against the said interest income and loss of Rs. 83,200 should be computed as per the assessee's revised return. The Income-tax Officer, however, held that the said expenditure could not be allowed as a deduction and he determined the interest income at Rs. 3,24,896 against which he allowed deduction of Rs. 8,096 on account of interest paid and computed the net income at Rs. 3,16,800. The Commissioner of Income-tax (Appeals) accepted the assessee's claim substantially and computed the assessee's income at nil. The Commissioner of Income-tax (Appeals) relied on the decision of the Income-tax Appellate Tribunal, Patna Bench in Bihar Alloy and Steel Ltd. where the surplus funds available were deposited in short-term deposits and it was held that the said interest receipts would go to decrease the cost of the assets, following the principles of accountancy for determining the actual cost of the assets. Before the Tribunal, the Revenue ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Revenue was not justified in picking up only one activity and assessing the income from the investment of surplus funds. The Tribunal accepted the contention of the assessee. Three decisions of the High Courts in Madhya Pradesh State Industries Corporation Ltd. v. CIT [1968] 69 ITR 824 (MP) ; CIT v. United Wire Ropes Ltd. [1980] 121 ITR 762 (Bom) and CIT (Addl.) v. Madras Fertilisers Ltd. [1980] 122 ITR 139 (Mad), were not considered relevant by the Tribunal as it was stated that these cases were either before, or did not take notice of, the Supreme Court decision in Challapalli Sugars Ltd.'s case [1975] 98 ITR 167. The Tribunal also took note of the decision of the Delhi High Court in CIT (Addl.) v. Indian Drugs and Pharmaceuticals Ltd. [1983] 141 ITR 134, where the High Court had observed that "if, for example, the surplus moneys of the company are invested to earn interest, the interest income would certainly be assessable under the head 'Income from other sources"', but said that it was merely an obiter dicta and that the ratio of the said decision was that the receipts and payments before the business had been fully set up, would be clearly on capital account and if the re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nstruction of any work or building or the provision of any plant, the sum so paid by way of interest might be charged to capital as part of the cost of construction of the work or building or the provision of the plant. In Madhya Pradesh State Industries Corporation Ltd. v. CIT [1968] 69 ITR 824 (MP), the question was if the sum received by way of interest by the assessee should be taxed under section 28 as business income or under section 56 as income from other sources. The assessee, a Government company, was incorporated for taking over and running certain concerns of the State Government. For the assessment year in question, the assessee did not carry on any business nor was there any production. The share moneys received by the company not being immediately required, were deposited in call-deposits in certain banks. The court held that the deposit of share capital in a bank could not be said to be an act of money-lending and, hence, the interest income was properly assessable as "Income from other sources" under section 56 of the Act. In Traco Cable Company Ltd. v. CIT [1969] 72 ITR 503 (Ker), the assessee, a public limited company, was engaged in the business of manufa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on of this court in CIT (Addl.) v. Indian Drugs and Pharmaceuticals Ltd. [1983] 141 ITR 134. The Revenue also relied on this judgment, on account of certain observations made by the Bench to which we will presently refer. In this case, the assessee-company was promoted to start the manufacture of drugs and pharmaceuticals and was in the process of setting up its factory building. During the relevant year, the factory building was under construction and the plant and machinery was in the process of installation. The business had not been set up and none of the units had commenced production. The assessee's gross receipts from sale of tender documents, etc., regarding construction and erection of plant and machinery to contractors amounted to Rs. 50,450, and after deduction of estimated expenditure the net receipts came to Rs. 40,540. The assessee also realised amounts of Rs. 28,241 by way of sale proceeds of trees, grass, etc., and Rs. 17,818 by way of sale proceeds of stones and boulders. This was consequential to the parcel of land being cleared for the purpose of construction of the factory. The assessee realised yet another amount of Rs. 7,520 on the supply of water and electric ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uld be only capital in nature. Elaborating, the court said that if the surplus monies of the company were invested to earn interest or if, as in Ajmera Industries' case [1976] 103 ITR 245 (Cal), the building constructed was not used by the company but let out to earn rental income, the interest or the rental income would certainly be assessable under the head "Income from other sources". On these observations, the Revenue relies in support of the present case before us. This court held that the receipts in that case were from sources which were not independent but which were inextricably linked with the process of the setting up of the business. In CIT v. Seshasayee Paper and Boards Ltd. [1985] 156 ITR 542 (Mad), the assessee, a public limited company, invested its paid-up share capital and loans obtained from the I.C.I.C.I. and Export and Import Bank, Washington, in banks on call-deposits and received interest during the relevant year. The assessee adjusted the interest payable on its loans against the interest received. The assessee had not established its factory during the year in question and there was, therefore, no question of computing its business income during that year ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... use of plant and equipment let out to them ; interest on advances to the contractor ; interest on short-term deposits ; miscellaneous income ; royalty; land-rent and liquidated damages received from the contractors. The assessee contended that these receipts were not taxable as these were incidental to the assessee's business of construction and that these had gone merely to reduce the cost of construction. The assessee also contended that the business of the assessee-company had already commenced with its incorporation under the Companies Act. The Tribunal held that the receipts from letting out properties to outsiders were chargeable under section 22 of the Act, but the other receipts were incidental to the business of the assessee and were not assessable. The Patna High Court, on reference, however, reversed the order of the Tribunal even on this point holding that the occupation of the company's quarters by the employees of the contractor was incidental and subservient to the business of the assessee, and all the receipts were incidental to the overall construction work during the pre-business period, and that none of the receipts were assessable to tax. In Bokaro Steel Ltd. v. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ied or warranted. In this view of the matter, the court held that no question of law arose in the matter. In CIT v. Derco Cooling Coils Ltd. [1992] 198 ITR 375 (AP), the question before the court was whether, on the facts and in the circumstances of the case, the amount of Rs. 18,913 being interest received by the assessee-company from bank deposits could not be brought to tax. The assessee-company had not yet gone into production and for the purpose of construction and setting up of an industry it borrowed funds and paid interest thereon. At the same time the assessee-company earned interest on the share capital monies received from the public which was kept in fixed deposit with the banks. In the original return, the assessee-company showed the interest received, but subsequently claimed that this amount shall not be treated as income as it was liable to be deducted from the interest paid on term loans and the net interest arrived at was to be capitalised. Thus, the contention was that the interest received during the pre-production or construction period shall be reflected in the capital cost of the project and it should go to reducing the capital cost. The court held that the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he assessee was entitled to the deduction of the administrative expenses and exploration and mining expenses from out of its interest income. The Tribunal came to the conclusion that the business was not started and, on that basis, the assessee's claim for determination of loss on account of administrative expenses and charges for exploration and mining was not accepted. The Tribunal, however, took the view that the interest earned during the period should go to reduce the capital cost inasmuch as the interest was on short-term deposits pending utilisation of available funds on erection, construction, etc. The allocation of expenses under the head "Exploration, general administration and capital items" was found to be prima facie justifiable under the relevant principles of accountancy. The Tribunal further held that there was no basis to conclude that that allocation was other than bona fide. The Tribunal directed that the assessee's claim for capitalisation be considered by the Income-tax Officer in the light of the decisions of the Special Bench in Nagarjuna Steels Ltd. v. ITO [1983] 3 ITO 796 (Hyd), and Arasan Aluminium Industries (P.) Ltd. v. First ITO [1982] 1 ITD 10 (Mad). T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... transposed into capital account unless the set off is in respect of a related item of expenditure. Thus, the principles enunciated in the judgment of the Special Bench in Arasan Aluminium Industries' case [1982] 1 ITD 10 (Mad), cannot be applied without the qualifications which were pointed out by the Division Bench of this court in the abovementioned case. Subject to this qualification, we do not see any illegality in the direction given to the Income-tax Officer to consider the claim of the assessee for set off of interest received on short-term deposits against unadjusted expenditure to reduce the capital cost to the extent admissible." Against this decision of the Andhra Pradesh High Court, the assessee filed a special leave petition in the Supreme Court but, it appears, that the same was dismissed. Before the Income-tax Officer the assessee also relied on the objects as per the memorandum of association of the assessee-company. The memorandum of association had main objects and also objects incidental or ancillary to the attainment of the main objects. In its submission, the assessee relied on one of its subsidiary objects which is as under : "B-19 : To invest any money ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... m other sources", was no doubt obiter dicta, but in our view it is nevertheless a correct statement of law. Share capital is raised by a company for setting up an industrial undertaking or utilising it for any other purpose. It is the money of the company. This cannot be so in the case of loan which is raised for a specific purpose. Clause B-19 of the subsidiary objects of the company is not applicable as it merely provided for investing of monies not immediately required for the purposes of its business when it had not started its business and the process of construction of the factory was still on. The activity of the deposit of surplus funds out of the share capital could not be said to be incidental to the construction of the factory. Interest income from bank deposits thus accrued or arose out of an independent source of income during the period when the business had neither been set up nor had commenced and was assessable as income from other sources. In view of our discussion, the answer to the question referred becomes quite self-evident. We, therefore, answer the question in the negative, in favour of the Revenue and against the assessee. - - TaxTMI - TMITax - Income ..... X X X X Extracts X X X X X X X X Extracts X X X X
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