TMI Blog1984 (4) TMI 17X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee had received the following interest in the previous year: Rs. 1. Interest which accrued during the year on call deposits (as per particulars furnished) 1,91,125 2. Interest on current account 839 3. Interest on fixed deposit 37 4. Interest refund on excess paid on letter of credit 530 5. Interest on call money due 6,298 ---------------- 1,98,829 --------------- He also found that I the assessee had debited during the previous year a sum of Rs. 4,56,232.96 being the interest due to the Export and Import Bank, Washington and the Industrial Credit and Investment Corporation of India Ltd. However, no portion of the interest receipt of Rs. 1,98,829, the details of which have been set out above, was offered for assessment on the ground that substantial funds had been borrowed during the accounting period for construction, that the funds which were not immediately required during the period of construction were invested on call deposits which yielded interest to the aggregate of Rs. 1,91,125, that in such cases, it will not be possible or correct to split the interest into two items, namely, interest earned on investment of share capital and investment of b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... see, had held that the proper mode of assessment in this case with regard to the interest earned both on its own funds as well as on borrowed funds would be to set off against the interest payments and the net result has to be directly taken to the cost of construction of its factory and capitalised. According to the Tribunal, when a company employing its own as well as borrowed funds by investing them in various deposits earns interest, it should be taken that it is done for two purposes, viz., (1) instead of keeping the funds idle, they want to make them productive; and (2) to reduce their capital investment by way of earning interest on the amount which is not immediately needed for the construction, and in this case, as business had not been started, and they were in the pre-production stage, any earning of income should be viewed from the point of view of reduction in the commitments, and it is well-settled that all interest payments incurred during the pre-commencement period would go to increase the cost of construction and will have to be capitalised and, therefore, any interest earned during the period irrespective of whether it was out of own funds or borrowed funds, wi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that year in order to arrive at the true total income of the assessee. According to the learned counsel for the Revenue, the interest income earned both from the investment of paid-up share capital as also from the borrowed funds should be taken to be the assessee's income under the head " Other sources " for the assessment year in question, and so long as there is no business income to be assessed as the factory itself was under construction, the said receipts cannot be adjusted against the interest paid on the borrowings. As the borrowings have been made for the purpose of construction, the interest paid on the borrowings has naturally to be capitalised. In support of the said plea, reference has been made to the following decisions. Traco Cable Company Ltd. v. CIT [1969] 72 ITR 503 (Ker) was a case where the share capital of a company had been invested in banks pending commencement of business. A question arose as to whether the interest received from banks was income from business and whether the office expenses before the commencement of the business is an allowable deduction from the interest income. The Kerala High Court held that clause (v) of article 3 of the memorandum o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... CIT v. United Wire Ropes Ltd. [1980] 121 ITR 762 (Bom) is a case where an assessee had, kept the share capital raised by it in bank deposit due to restrictions on remittance which earned interest and interest was also paid on foreign exchange loan. A question arose as to whether the interest paid on foreign exchange loan can be set off against the interest received on the investment of capital. The Bombay High Court has taken the view that the transaction of deposit of the share capital with the bank and the transaction of foreign exchange loan are not interconnected, and, therefore, there can be no claim of set-off of interest received. In Addl. CIT v. Madras Fertilisers Ltd. [1980] 122 ITR 139 (Mad), a question arose whether the interest paid on borrowings could be claimed as a deduction from the interest received on bank deposits which is taxable under the head " Other sources ", and this court held that the interest received by the assessee on its deposits in the special account constituted its income, that though the setting up of a factory may be a preliminary and essential step for the purpose of carrying on the business of the assessee, it cannot be said to be carrying on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be allowed as deduction from the interest received as it had invested the amounts borrowed, In support of this plea, reference has been made to the decision in CIT v. Rajendra Prasad Moody [1978] 115 ITR 519 (SC). In that case, the assessee had borrowed monies for the purpose of making investment in certain shares and paid interest thereon during the accounting period relevant to the assessment year but did not receive any dividend on the shares purchased with those monies. A question arose as to whether the interest on monies borrowed for investment in shares which had not yielded any dividend was admissible as a deduction under section 57(iii) of the Income-tax Act, 1961, in computing its income from dividend under the head " Income from other sources ", and the Supreme Court held that what section 57(iii) requires is that the expenditure must be laid out or expended wholly and exclusively for the purpose of making or earning income, that the section does not require that this purpose must be fulfilled in order to qualify the expenditure for deduction: it does not say that the expenditure shall be deductible only if any income is made or earned, and, therefore, the assessee in t ..... 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