Commissioner of Income Tax vs Petro-fils Co-operative Ltd.

R.K. Abichandani, J.—The Tribunal, Ahmedabad, has referred for the opinion of this Court under s. 256(1) of the IT Act, 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 IT Act, 1961 ?

The matter pertains to asst. yrs. 1976-77 and 1977-78. The assessee is a co-operative society which is assessable in the status of AOP. The assessee was in the process of setting up its business of manufacturing filament yarn. Admittedly, production had not commenced during the relevant previous years. In the return of income, 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 ITO 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 asst. yr. 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 ITO, however, allowed deduction of 5 per cent expenses for the asst. yr. 1977-78. The CIT(A) confirmed the decision of the ITO, but raised deduction of expenditure to 10 per cent as against the 5 per cent allowed by the ITO for the asst. yr. 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 Hon''ble Supreme Court in Tuticorin Alkali Chemicals and Fertilizers Ltd., Madras Vs. Commissioner of Income Tax, Madras, which it has been held that if a person borrows money for business purposes, but utilises that money to earn interest, however 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 s. 56 or any other provisions of the IT Act. The interest income and other miscellaneous income fell under the head "Income from other sources", within the meaning of s. 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 vs. CIT (supra). 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 costs.