COMMISSIONER OF INCOME-TAX VS PETRO-FILS COOPERATIVE LTD., 2001 PTD-GUJARAT-HIGH-COURT-INDIA 3644 (1998)

Income‑tax‑‑‑

‑‑‑‑Income from other sources‑‑‑Interest‑‑‑Investment of borrowed funds prior to commencement of business‑‑‑Interest earned is assessable as "income from other sources "‑‑‑Indian Income Tax Act, 1961, S.56.

The assessee a cooperative society, was in the process of setting up business for manufacture of filament yarn. The production had not commenced but the borrowed funds were invested in short‑term fixed deposits with banks. Such interest income alongwith other miscellaneous income from sale of newspapers and small recoveries from contractors were brought to tax under the head "Other sources". The Tribunal held that the receipts were not taxable as income. On a reference:

Held, that the interest income and other miscellaneous income was clearly of revenue nature and fell under the head "Income from other sources" within the meaning of section 56 of the Income Tax Act, 1961. Accordingly it was taxable.

Tuticorin Alkali Chemicals and Fertilizers Ltd. v. CIT (1997) 227 ITR 172 (SC) fol.

Mihir Joshi with Manish R. Bhatt for the Commissioner.

JUDGMENT

R.K. ABICHANDANI, J.‑‑‑ The Income‑tax Appellate Tribunal, Ahmedabad, has referred for the opinion of this Court under section 256(1) of the Income Tax Act, 1961, the following question:‑‑

"Whether, on the facts and in the circumstances of the case, the Tribunal was right in coming to the conclusion that the interest and miscellaneous receipts were not liable to be assessed as income under the Income Tax Act, 1961?"

The matter pertains to the assessment years 1976‑77 and 1977‑78. The assessee is a cooperative society, which is assessable in the status of an association of persons. The assessee was in the process of setting up its business of manufacturing filament yarn. Admittedly, the production had not commenced during the relevant previous years. In the return of income, the assessee had disclosed "nil income stating that since the production has not yet started, the loss was to be capitalised after the production starts. The Income‑tax Officer, however, held that the interest income of Rs.27,568 and the miscellaneous income of Rs.1,026 which the assessee received during the relevant previous year of 1976‑77, was taxable. Similarly, in respect of the assessment year 1977‑78, he held that the interest amount of Rs.1,56,151 and miscellaneous income of Rs.923 were taxable as "other income". The Income‑tax Officer, however, allowed deduction of five per cent. expenses for the assessment year 1977‑78. The Commissioner of Income‑tax (Appeals) confirmed the decision of the Income‑tax Officer, but raised deduction of expenditure to 10 per cent. as against the five per cent. allowed by the Income‑tax Officer for the assessment year 1977‑78. The Tribunal, however, held that the receipts in question should be treated as reduction in project cost and cannot be treated as income in the ordinary sense and allowed the appeal of the assessee.

Admittedly, when the factory, of the assessee was under construction, it had borrowed funds from various sources which were kept by the assessee in banks as short‑term deposits and had received the aforesaid interest income. The miscellaneous income comprised merely income by sale of old newspapers and small recoveries from contractors for water, electricity, etc.

The question similar to the one which is referred in this matter had come up for consideration before the Supreme Court in Tuticorin Alkali Chemicals and Fertilizers Ltd. v. CIT (197) 227 ITR 172, in which it has been held that if a person borrows money for business purposes, but utilises that money to earn interest, howsoever, temporarily, the interest so generated will be his income. Such income can be utilised by the assessee whichever way he likes. He may or may not discharge his liability to pay interest with this income. It was held that merely because such income was utilised to repay the interest on the loan taken by the assessee, it did not cease to be his income. It was also held that the accounting practice cannot override the provisions of section 56 or any other provisions of the Income‑tax Act. The interest income and other miscellaneous income fell under the head "Income from other sources", within the meaning of section 56 of the said Act. The said income of the assessee was clearly of revenue nature and was required to be taxed accordingly as income from other sources. The decision of the Tribunal that the said interest and miscellaneous receipts were not liable to be assessed as income, is therefore, erroneous and contrary to the ratio of the decision of the Supreme Court in Tuticorin Alkali Chemicals and Fertilizers Ltd. v. CIT (1997) 227 ITR 172. We, therefore, answer the question referred to us in the negative in favour of the Revenue and against the assessee. This reference stands disposed of accordingly with no order as to

M.B.A./560/FC

Order accordingly.