TaxTMI 
TaxTMI 
2008 (4) TMI 234
X X X X Extracts X X X X
X X X X Extracts X X X X
....s not taxable as income from other sources, but is income from profit and gains of business and was liable to be set off against the other liability of the assessee to pay interest on borrowed money?" 3. The necessary facts are, that the assessee filed a return which was processed under Section 143 (1)(a). Thereafter the case was selected for scrutiny, and notices were issued under Section 143(2) and 142 (1), from time to time, and query letters were also issued. In response whereto, the assessee appeared through authorised representative, and produced the relevant books of accounts, and fresh assessment order was passed under Section 143(3). By this assessment, fresh computation of income was made. However, since the controversy relates only to one item, being an amount of Rs. 12,10,286, being the amount which had been set off by the assessee, against the public issue expenses, which are to be amortized in future, and this amount represented the interest earned by the assessee on the share application money, we need not go into the other part of this fresh assessment order. The learned Assessing Officer relying upon the decision of Hon'ble the Supreme Court, in Tuticorin Alkali C....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... under Section 35D of the Act, which clearly specifies the various heads under which the expenses incurred is permitted to be amortized, in terms of that section, and that section does not provide, for any setting off, of the amount received by way of interest. It is contended, that the matter is required to be examined, as if there were two channels for flow of funds; one being entry channel, and the other being exit channel, the money coming from entry channel is liable to be taxed, and money flowing out from exit channel is required to be considered for amortized under Section 35D, and then, there is no provision for setting off. With this it was contended, that in Tuticorin's [1997] 227 ITR 172 (SC) case it was held by Hon'ble the Supreme Court, that the application, or destination, of the money received has no relevance for the purpose of taxing the amount received, inasmuch as the liability to tax accrues immediately on receipt of the money, and is not deferred, to be dependent, on the application or destination of the money received by the assessee. Then, distinguishing the judgment in Bokaro Steel's [1999] 236 ITR 315 case it was contended, that the judgment in Tuticorin's ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e pain of the penalty provisions. In that view of the matter, since the interest accrued on this amount was not a result of any voluntary act of the assessee, the principle propounded in Tuticorin's [1997] 227 ITR 172 (SC) case cannot apply. On the basis of this reasoning, it was contended, that the nearest case applicable to the controversy is, Bokaro Steel's case [1999] 236 ITR 315 as it is not in dispute, that the assessee is entitled to amortize public issue expenses, and since the interest accrued was in the nature of "essential bye-product" of the exercise of public issue, and therefore was, within the meaning of principle propounded in Bokaro Steel's case [1999] 236 ITR 315 intrinsically connected with the public issue expenses, and had gone to reduce the public issue expenses, of which the assessee would claim amortization, and therefore, it has rightly been ordered by the learned Tribunal, to be adjusted against the public issue expenses, which is to be amortized at an appropriate time, in accordance with the provisions of Section 35D of the Income Tax Act. 9. We have considered the submissions, and have gone through the judgments cited on either side. 10. First of....
X X X X Extracts X X X X
X X X X Extracts X X X X
....se "actual cost" has not been defined in the Act, therefore, it has to be explained in the common parlance, and to find that out, the normal rules of accountancy, prevalent in the commercial and industrial circles were noted, but then the Hon'ble Supreme Court found, in Tuticorin's case [1997] 227 ITR 172 (SC)., that it (Challapally Sugars' case [1975] 98 ITR 167(SC)) is clearly a different case, inasmuch as the question required to be decided is, as to whether a particular receipt is of the nature of the income, which is a question of law, required to be decided by the Court, on the basis of the provisions of the Act, and the interpretation of the term "income", given in large number of decisions of the High Courts, and the Privy Council, and also of the Supreme Court. Then it was held, that it is well settled, that the income attracts tax as soon as it accrues, and the application, or destination of the income, has nothing to do with its accrual or taxability. It is also well settled, that interest income is always of a revenue nature, unless it is received by damages or compensation. Thus, a reference made to the Hon'ble Supreme Court, by High Court, was decided. Since the judgm....
X X X X Extracts X X X X
X X X X Extracts X X X X
....nstruction of work, which were not immediately required, were put in short term deposits, and earned interest, which was held to be taxable, and that, the question is concluded by the decision in Tuticorin's case [1997] 227 ITR 172 (SC). However, while proceeding further, the Hon'ble Supreme Court at page 323, after recapitulating again the conclusions in Tuticorin's case [1997] 227 ITR 172 (SC) held as under:- "However, while interest earned by investing borrowed capital in short term deposits is an independent source of income not connected with the construction activities or business activities of the assessee, the same cannot be said in the present case where the utilisation of various assets of the company and the payments received for such utilisation are directly linked with the activity of setting up the steel plant of the assessee. These receipts are inextricably linked with the setting up of the capital structure of the assessee company. They must, therefore, be viewed as capital receipts going to reduce the cost of construction" 13. For this purpose reference was made to Challapalli Sugar Ltd's case [1975] 98 ITR 167(SC)), and it was held, that the receipts of interest....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... to income-tax under any of the heads specified in section 14, items A to E. (2) In particular, and without prejudice to the generality of the provisions of subsection (1), the following incomes, shall be chargeable to income-tax under the head "Income from other sources", namely :- (i) dividends ; (ia) income referred to in sub-clause (viii) of clause (24) of section 2 ; (ib) income referred to in sub-clause (ix) of clause (24) of section 2 ; (ic) income referred to in sub-clause (x) of clause (24) of section 2, if such income is not chargeable to income-tax under the head "Profits and gains of business or profession" ; (id) income by way of interest on securities, if the income is not chargeable to income-tax under the head "Profits and gains of business or profession" ; (ii) income from machinery, plant or furniture belonging to the assessee and let on hire, if the income is not chargeable to income-tax under the head "Profits and gains of business or profession"; (iii) where an assessee lets on hire machinery, plant or furniture belonging to him and also buildings, and the letting of the buildings is inseparable from the letting of the said machinery, plant or furnitur....
X X X X Extracts X X X X
X X X X Extracts X X X X
....uch schemes; (ic) security receipt as defined in clause (zg) of section 2 of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002; (id) units or any other such instrument issued to the investors under any mutual fund scheme; (ii) Government securities; (iia) such other instruments as may be declared by the Central Government to be securities; and (iii) rights or interest in securities'." 19. With quoting the above provision we would not be blamed to be hastening, in coming to the conclusion, that the amount of application money, lying in the separate account with the bank, as provided in Section 73(3) and (3A) of the Companies Act, does not fall within the expression "securities", even though the definition is inclusive one. 20. That being the position, this amount of interest, accruing on the share application money, lying in deposit with the bank, under the mandate of Section 73(3) and (3A) cannot be said to be falling within the definition of "Income from other sources", as provided in Section 14F read with Section 56(2) (id) of the Act. 21. Since in Tuticorin's case [1997] 227 ITR 172 (SC), the amount was lying....