TMI Blog1991 (6) TMI 12X X X X Extracts X X X X X X X X Extracts X X X X ..... ept in fixed deposit with the banks. At this stage, it is relevant to point out that no details are forthcoming from the record as to the periods of deposit and the purpose for which the share money was meant to be utilised or actually utilised. The respondent, in its return, originally accepted the interest receipt of Rs. 18,913 as its income. Later on, the respondent claimed that the said amount shall not be treated as income as it is liable to be deducted from the interest paid on term loans and the net interest arrived at, i.e., Rs. 2,21,641, is to be capitalised. In other words, the contention of the assessee 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. This contention was not accepted by the Income-tax Officer who held that the interest received is not a capital receipt and that it is liable for taxation under the head " Income from other sources ". The Commissioner (Appeals) affirmed the order of the Income-tax Officer. On further appeal to the Appellate Tribunal, the Tribunal accepted the contention of the assessee and annulled the assessme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... unal, it may be noticed that emphasis has been placed on the views of the Research Committee of the Institute of Chartered Accountants of India in its booklet "Study on Expenditure during Construction Period " to which reference will be made later. The fact that the opinion of the Research Committee of the Institute of Chartered Accountants on the allied subject was cited with approval by the Supreme Court in Challapalli Sugars Ltd. v. CIT [1975] 98 ITR 167 was taken into account by the Special Bench. Reliance has been placed before us by both sides on the passages in the same booklet referred to by the Tribunal. Let us now notice the rival submissions in brief. It is the contention of learned standing counsel for the Income-tax Department, Mr. S. R. Ashok, that the accountancy principle enunciated by the Research Committee of the Institute of Chartered Accountants does not either help the assessee or it should not have a bearing on the true nature of the receipt whether it is income or not. He contends that the interest received from paid-up share capital is nothing but income unless there is a direct nexus between the receipt and expenditure which is sought to be capitalised. M ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... come may be earned by way of share transfer fees or by way of interest from the temporary investment of surplus funds prior to their utilisation for capital or other expenditure. 8.2. Where a particular item of miscellaneous income can be directly related to a 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 those vehicles. Similarly, interest income earned during the construction period may be off-set against interest expenses incurred during this period." With regard to interest charges incurred during the period of construction, it is stated as follows : " There is no doubt that interest charges and commitment fees incurred after the date of commencement of commerc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... court in Nagarjuna Steels' case [1988] 171 ITR 663 had gone a step further. In that case, the question was whether the bank interest received during the stage of construction of the factory on account of depositing a part of the borrowed money in the bank should be treated as " income from other sources " or whether it should go towards reducing the actual capital cost of the assets. This court put its seal of approval on the accountancy principle stated in paragraphs 8.1 and 8.2 of the booklet "Study on Expenditure during Construction Period". This court observed at page 667 that : " On the facts found in this case, we are of the opinion that the reasoning adopted by the Tribunal is the correct one and is a realistic assessment of the situation. The company was incorporated for setting up a plant and to manufacture certain products and to deal in them. During the relevant accounting year, it was in the course of setting up the plant. For that purpose, it had borrowed certain amounts upon which it was paying interest. All the amount borrowed was not needed at once. A portion of the said amount was kept in deposit, until needed. Those deposits earned some interest. Would it be re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee's contention in this behalf. No doubt, it is stated in the last sentence in paragraph 8.2 of the booklet referred to above that " Similarly, interest income earned during the construction period may be off-set against interest expenses incurred during this period". This sentence may be suggestive of the meaning that whatever interest is received from any source can be set off against the interest expenses incurred on whatsoever account. 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, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... While distinguishing the decisions in CIT v. United Wire Ropes Ltd. [1980] 121 ITR 762 (Bom) and Addl. CIT v. Madras Fertilisers Ltd. [1980] 122 ITR 139 (Mad), this court adverted to the finding recorded in those cases to the effect that there was no connection or nexus between the two transactions of payment of interest and receipt of interest and held that it remained as a distinguishing factor. We are of the view that the theory of transposing an item of receipt--which is prima facie income into capitalisation account by resorting to an omnibus set off, cannot be countenanced. As already observed, the set-off must be in respect of a related item of expenditure. In the instant case, the amount of expenditure out of which the interest amount is sought to be deducted relates to term loans used for construction and setting up of the plant. The receipt in question arises out of share capital money deposited with the bank which may or may not be utilised or meant to be utilised for the purpose of setting up of the plant. This again emphasises that the interest received may not stand on the same footing as the interest incurred during the pre-production period so that one could be se ..... X X X X Extracts X X X X X X X X Extracts X X X X
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