Income-tax---

----Income---Other sources---Interest---Company---Interest earned on share capital kept in fixed deposit---Is income from other sources---Not to be adjusted against interest and paid on loans in pre-production period---Indian Income Tax Act, 1961, Ss. 56 & 57.

The assessee, a State Government undertaking, kept its share capital money in fixed deposits with a bank. According to the Tribunal, because the said money was to be used later as capital for starting the business of the assessee, the interest earned was a capital receipt on a reference:

Held, that section 56 of the Income Tax Act, 1961, envisages that income of every kind 'which is not to be excluded from the total income under the Act shall be chargeable to income-tax, if it is not chargeable to income-tax under any of the heads in section 14 of the Act. The amount which was received by way of interest on the short-term deposits undoubtedly fell in the category of income from other sources.

Held also, that deduction income from permissible from income from other sources has been provided for under section 57 only and it is nowhere provided that the interest so earned can be adjusted or reduced from the interest paid on loans during the pre-production period.

Challapalli Sugars Ltd. v. CIT (1975) 98 ITR 167 (SC); CIT v. Derco Cooling Coils Ltd. (1992) 198 ITR 375 (AP); CIT v. Nagarjuna Steels Ltd. (1988) 171 ITR 663 (AP); CIT v. Seshasayee Paper and Boards Ltd. (1985) 156 ITR 542 (Mad.); CIT v. Tamil Nadu Industrial Development Corporation Ltd. (1991) 189 ITR 670 (Mad.) and Traco Cable Co. Ltd. v. CIT (1969) 72 ITR 503 (Ker.) ref.

Dr. A.K. Saraf for the Commissioner.

Dr. B.P. Todi and R.K. Joshi for the Assessee.

JUDGMENT

D.N. BARUAH, J. ---The Income-tax Appellate Tribunal, Guwahati Bench, Guwahati, pursuant to the direction given by this Court under section 256(2) in Civil Rules Nos. l(M), 2(M), 8(M) and 13(M) of 1987 has referred the following question for opinion of this Court:

"Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in holding that the interest earned by the assessee on money kept in fixed deposits with a bank, was not assessable under the Income Tax Act, 1961, because the said money so kept in fixed deposits, was to be used later as capital for starting the business of the assessee and hence the interest earned was capital receipt, even though the assessee had some business transactions in the sale of ginger and coffee seedlings during the accounting year in which the interest was earned?"

The assessee is a State Government undertaking engaged in rubber; coffee and onion plantations in different parts of the State. The entire share capital was held by the State Government. Investments were made for the plantation. The Assessing Officer found that the assessee obtained revenue receipts from the interest on fixed deposits which were liable to tax. Revenue receipts included nominal sale of Rs.14,042 for coffee plants sold to the Nagaland Government. The assessee had shown net loss in the profit and loss account for Rs.7,76,502 and transferred 90 per cent. of the same to the capital account and the rest was claimed as revenue loss for the year.

The Income-tax Officer in the order of the assessment year 1976-77 found that the interest received was Rs.2,43.970 on fixed deposits. According to the Income-tax Officer, the amount was not connected with any business of the assessee. The net loss return was not, therefore, accepted. The Income ?tax Officer allowed deduction of ten per cent., of the expenses for earning the interest income. For the assessment year 1977-78, the Assessing Officer gave a similar order. He, therefore, computed the income of the assessee in respect of the interest from fixed deposits at Rs.51,855 as per the provisions of law. For the assessment year 1978-79, a similar order was passed and the income of the assessee in respect of interest received was assessed.

The assessee being aggrieved by the order took up the matter before the Commissioner of Income-tax (Appeals). After hearing the appeal, the Commissioner of Income-tax (Appeals) found that the case. of the present assessee was similar to that of Arasan Aluminium Industries (Pvt.) Ltd. v. ITO of the Special Bench of the Appellate Tribunal, Madras. According to him, a similar view was expressed by the Delhi High Court in the case of J.M. Aluminium Industries Ltd. The Commissioner of Income-tax (Appeals) also observed that the memorandum and articles of association showed that the main objects of the corporation were development of backward areas in the State and raising plantation crops and directed the Assessing Officer to exempt from tax the income from interest.

Thereafter, the Revenue took up an appeal before the Appellate Tribunal against the above direction of the Commissioner of Income-tax (Appeals). The Appellate Tribunal considered different aspects of the matter and found that the present dispute was similar to that decided by the Appellate Tribunal, Special Bench, in the case of Arasan Aluminium Industries (supra) and sustained the consolidated order of the Commissioner of Income-tax (Appeals). The Revenue requested the Tribunal to refer the above questions. The Appellate Tribunal, however, refused. Situated, thus, the Revenue filed the aforesaid civil rules and this Court after considering all the aspects of the matter directed the Tribunal to refer the above questions for opinion of this Court. Accordingly, the Tribunal referred the above questions under section 256(2) of the Act for the opinion of this Court.

We heard Dr.A.K. Saraf, learned special counsel appearing on behalf of the Revenue, and Dr.B.P. Todi, learned counsel appearing on behalf of the respondent.

For the assessment year 1976-77, the Income-tax Officer noted that the assessee was engaged in developing and growing of rubber, coffee and ginger plantations in different parts of the State. The Income-tax Officer also observed that for the said assessment year, the interest received was Rs.2,43,970 on bank fixed deposits and according to him this was not connected with any business of the assessee. Net loss of 90 per cent. was therefore not accepted. The Income-tax Officer accordingly allowed ten per cent. as reasonable expenditure for earning the income. He took Rs.2,19,570 as income of the assessee from other sources for the assessment year 1976-77 and for other years subsequent to the assessment year 1976-77, the Income ?tax Officer assessed in a similar manner and added a similar income from the bank deposits as income of the assessee from other sources.

The contention of learned counsel for the Revenue is that the Tribunal erred in law and on the facts in holding that the interest received from fixed deposits of the assessee was not taxable in the hands of the assessee as income from other sources. Learned counsel further contended that the Inspecting Assistant Commissioner of Income-tax in this regard had issued instructions under section 144-B that the assessee had been carrying on some business during the said year though in a limited scale. The sale of plants and crops was definitely a part of the business activities as envisaged by the memorandum and articles of association of the assessee-company and the interest income derived from the fixed deposit made by the assessee was an income of the assessee from other sources. The Commissioner of Income?tax (Appeals) as well as the Tribunal wrongly relied on the decision of Challapalli Sugars Ltd. Dr. Saraf further submitted that the amount deposited in the fixed deposit was funds of the share capital unconnected with the business.

Dr. Todi, learned counsel appearing on behalf of the assessee, on the other hand, submitted that in the facts and circumstances of the present case the income received by way of interest from the fixed deposits could not be stated to be income from other sources. Learned counsel further submitted that the corporation was only going on investing for development of the crop plantation and a major portion of the surplus of the share capital money which came from the State Government was actually invested in the fixed deposits during the entire period of plantation. It was further submitted that the assessee earned interest on the surplus of the capital which was to be kept in the fixed deposit with a view to reducing the cost of plantation and development.

In order to answer the above question it is to be seen under the facts and circumstances of the case whether the interest received from the fixed deposit of the amount which was later to be used as capital for starting the business of the assessee can be said to be an income from other sources and whether it is taxable or not. In this connection, a catena of decisions had been cited before this Court by learned counsel appearing on behalf of the Revenue as well as by counsel appearing on behalf of the assessee.

Before we deal with the matter it will be apposite to notice a few -relevant provisions of the Act.

In section 14 of the Income Tax Act various heads of income for the purpose of charge of income-tax and computation of total income are classified in items A to F. Item F of section 14 deals with the income from other sources. Section 10 of the Act refers to those income which are not to be included in computing the total income of any person. Under section 56 of the Act, income of every kind which is not excluded from the total income under the Act shall 'tie chargeable to income-tax under the head "Income from other sources", if it is not chargeable to income-tax under any of the heads mentioned in items A to E of section 14.

Looking to those provisions it will appear that those incomes which are not exempted from payment of income-tax under section 10 shall be liable for payment of income-tax. Interest is undoubtedly an income and section 10 does not exempt payment of income-tax on interest. The income which does not come under items A to E falls under item F of section 14 of the Act, i.e., "Income from other sources". Under 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".

Now, the question is whether interest accrued on an amount earmarked for construction of a building or for plantation, not utilised for a certain period but kept in the fixed deposit shall be treated as "Income from other sources". The accountancy principle had been enunciated in the booklet "Study on Expenditure during Construction Period", published by the Institute of Chartered Accountants of India. In the 1982, Reprint Edition of this booklet, at paragraph 8, it was stated as follows:

"8. Income during the construction or pre-production period;

8.1.????? It is possible that a new project may earn some income from miscellaneous sources during its construction or pre-production period Such income 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 . . . . "

Regarding the interest charges incurred during ' the period of construction, the aforesaid booklet stated as follows:

"There is no doubt that interest charges and commitment fees incurred after the date of commencement of commercial production should be treated as revenue expenditure in the normal way. However, during the period of construction. both these charges would represent indirect construction expenditure and should be added to the total capital cost of the project ( ....) These remarks would apply with particular force in the case of loans which have been taken for the purchase of capital assets or for incurring capital expenditure ....This view has now been accepted by the Supreme Court of India in the case of Challapalli Sugars Ltd. v. CIT (1975) 98 ITR 167. With regard to interest charges and commitment fees on loans taken specifically and exclusively for the purpose of providing working capital, the treatment suggested above may not be proper and, in this case, it will be more appropriate to transfer the interest charges and commitment fees during the period of construction to a separate account which is carried forward in the balance-sheet under the group heading of 'Miscellaneous expenditure' until it is subsequently written off to profit and loss account after the commencement of commercial production, over a period not exceeding 3 to 5 years."

In Challapalli Sugars Ltd. v. CIT (1975) 98 ITR 167, the Supreme Court had the occasion to consider this aspect of the matter. The question that arose in that case was whether interest paid before the commencement of production on amounts borrowed by the assessee for the acquisition and installation of plant and machinery would form part of the "actual'" cost" of the assets to tae assessee within the meaning of the expression in section 10(5) of the Indian Income-tax Act, 1922, and whether the assessee would be entitled to depreciation allowances and development rebate with reference to such interest also. The Supreme Court noticed the Statement on Auditing Practices issued by the institute of Chartered Accountants of India and Higher Book-keeping and Accounts by Cropper Morris and Fison, Seventh edition, and held that the accepted accountancy rule for determining the cost of fixed asset- was to include all expenditure necessary to bring such assets into existence and to put them in working condition in case money was borrowed by a newly started company which was in the process of constructing and erecting its plant, the interest incurred before the commencement of production on such borrowed money could be capitalised and added to the cost of the fixed assets created as a result of such expenditure. This rule of accountancy, the apex Court held, should be adopted for determining the actual cost of the assets in the absence of any statutory definition or other indication to the contrary. Therefore, the Supreme Court held that interest incurred during the period of construction of plant should be treated as an addition to the cost of the project unless of course the loan was borrowed for working capital purposes. Such interest would go into the capitalisation amount.

In CIT v Nagarjuna Steels Ltd. (1988) 171 ITR 663 (AP), the question that arose before the Andhra Pradesh High Court 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. In the said case the company was incorporated for setting up a plant and for manufacturing certain products and for dealing 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. The question was whether it should be treated as "income from other sources" or actual cost. The Andhra Pradesh high Court held that interest paid by the assessee on the loans and the interest earned by the assessee on those loans should constitute one single account and, therefore, the interest received should be set off against the interest payment and the balance should be considered for capitalisation purpose and accordingly interest received on account of deposit of borrowed funds was held to be not an "income from other sources". However, in a later decision in CIT v. Derco Cooling Coils Ltd. (1992) 198 ITR 375, the Andhra Pradesh High Court considered the said case and held.

???? we do not find any warrant in law in extending the principle ofthe decision of this Court in Nagarjuna Steels' case (1988) 171 ITR663 to a case of interest earned from a different source, viz., share money, Neither the accountancy principle laid down by the Instituteof Chartered Accountants of India nor the reasoning contained in the decision? of the Supreme Court in Challapalli Sugars' case (1975) 98 ITR 167 and of this Court in Nagarjuna Steels' case (1988) 171 ITR 663 would merit the acceptance of the assessee's contention in this behalf ....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, share transfer fees, interest income, income from hire of equipment or assets, and income from sale of products manufactured during the period of test runs and experimental production. It is recommended that such income should be set off against the related items of expenditure so that only the net `amount of the expenditure is capitalised or treated as deferred revenue expenditure, as the case may be. In either case, consideration may have to be given to the question of providing for the income-tax liability on such income .... "

In CIT v. Derco Cooling Coils Ltd. (1992) 198 ITR 375 (AP), the question was whether amounts received by way of interest from share capital money deposited in bank which may or may not be utilised for the purpose of setting up of the plant can be capitalised. This again emphasises that the interest incurred during the pre-production period so that one could [not ?] be set off against the other.

In a recent case in CIT v. Tamil Nadu Industrial Development Corporation Ltd. (1991) 189 ITR 670, the Madras High Court held that the interest received on short-term bank deposits is assessable as income from other sources. In the said case it was held that interest paid on money borrowed but not immediately used for business was not business expenditure. Such interest could not be adjusted against interest received when such money was invested in short-term bank deposits. The interest received on short-term bank deposits wag assessable as income from other sources. The apex Court refused special leave on appeal. (see (1991) 187 ITR (St.) 41).

A similar view was expressed by the Madras High Court in CIT v. Seshasayee Paper and Boards Ltd. (1985) 156 ITR 542. In the said case the assessee-company invested its paid-up share capital and loans obtained from the ICICI and Exports and Imports Bank, Washington, in banks on call deposits and received interest. The interest payable by the company on its loans was adjusted against the interest received. The Madras High Court in the said case held that as the assessee had not established its factory during the assessment year in question, there was no question of computing its business income during the year and hence, there was no question of application of sections 70 and 71 of the Act during the assessment year in question and only in the computation of business income, expenditure or set off of the loss from the income from business would arise. Accordingly, the interest received would not be assessed and the difference between the interest paid and the interest received should be capitalised. Interest earned by the assessee on investment of share capital in call Deposits could be assessed separately under the head "income from other sources".

In Traco Cable Co. Ltd. v. CIT (1969) 72 ITR 502, the Kerala High Court also held that in case where business had not commenced and the amounts were not immediately required for any business, the receipt of income by interest was only incidental or consequential on the deposit. It was in the business which was carried on by the company in respect of deposit of share capital and the expenditure was not incurred for the purpose of making or earning interest received by the company on the deposit of the share capital.

Section 56 of the Act envisages that 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 section 14, items A to E.

Section 57 of the Act provides for deduction from income which is chargeable under the head "Income from other sources". The amount which has been received by way of interest on short-term deposit undoubtedly falls in the category of income from other sources. Deduction which is permissible from such source of income has been provided under section 57 only and it is nowhere provided that the interest so earned, can be adjusted or reduced from the interest paid on loan during the, pre-production period. In case of loan, no doubt, it goes to reduce the burden of interest payable on loan, but in the absence of any provision in the Act, the amount cannot be deducted. It cannot be said that the receipt is not an income and once it is an income then it has to be dealt in accordance with the provisions of Act.

From various decisions and the provisions of law it is abundantly clear that the receipt by way of interest on fixed deposit is an income assessable under the head "Income from other sources".

In this case, as already discussed, the share capital was kept in fixed deposit and interest was earned thereon. This is definitely an income from other sources within the meaning of section 57 of the Income-tax Act. Therefore, in our opinion, -the Tribunal was not justified in law in holding that the interest earned by the assessee on money kept in fixed deposit with the bank was not assessable under the Income Tax Act. Accordingly, we answer the question in the negative, against the assessee and in favour of the Revenue.

N.S. SINGH, J.---I agree,

M.B.A./1268/FC ??????????????????????????????????????????????????????????????????? Reference answered.