Commissioner of Income Tax vs Tamilnadu Jai Bharath Mills Ltd.

K. Raviraja Pandian, J.—The above two tax appeals have been filed for determination of the following substantial question of law:

Whether in the facts and circumstances of the case, the Tribunal was right in holding that interest receipts on deposits prior to commencement of

business should be treated as a capital receipt and not an income from other sources

The assessee is a textile mill, which was assessed to income tax. During the relevant periods 1991-92 and 1992-93, the assessee had not

commenced its business, but had substantial interest receipts, which the Assessing Officer brought to tax under ""income from other sources"".

Aggrieved by the assessment orders, the assessee filed appeals before the Commissioner of Income Tax (Appeals), who upheld the order of the

assessing officer and dismissed the appeals, distinguishing the ratio of the Supreme Court''s judgment in the case of Challapalli Sugar Ltd. Vs. The

Commissioner of Income Tax, A.P., Hyderabad, and following the decision of this Court in the case of ADDITIONAL COMMISSIONER OF

Income Tax, MADRAS-I Vs. MADRAS FERTILISERS LTD., and Commissioner of Income Tax Vs. Seshasayee Paper and Boards Ltd., .

Being not satisfied, the assessee carried the matter on second appeal to the Income Tax Appellate Tribunal. The Tribunal held that the issue is

covered by the case of Challapalli Sugar Ltd. Vs. The Commissioner of Income Tax, A.P., Hyderabad, , wherein it was held that interest paid

prior to commencement of production can be capitalised, and as a corollary income received was to be treated as a capital receipt. The

correctness of the said order is now canvassed in these appeals.

Learned Counsel on either side submit that the issue is already covered by the decision of this Court in the case of Commissioner of Income Tax

Vs. Seshasayee Paper and Boards Ltd., , which decision was upheld by the Supreme Court in the case of Tuticorin Alkali Chemicals and

Fertilizers Ltd., Madras Vs. Commissioner of Income Tax, Madras, . In that case, while considering the income earned from the surplus funds, the

Apex Court has held that in order to earn income out of the surplus funds, the company had invested the amount for the purpose of earning

interest. The interest thus earned was clearly of revenue in nature and would have to be taxed accordingly. The accountants might have taken some

other view, but accountancy practice was not necessarily good law. This was not a case of diversion of income by overriding title. The assessee

was entirely at liberty to deal with the interest amount as it liked. The application of the interest income for payment of interest would not affect its

taxability in any way. Similarly, any income from a non-business source could not be set off against the liability to pay interest.

While rendering such finding, the Supreme Court has taken note of the decision in Commissioner of Income Tax Vs. Seshasayee Paper and

Boards Ltd., and the Supreme Court has approved the views of this Court taken in that case, wherein the assessee company invested its paid up

share capital and loans obtained from the ICICI and Export and Import Bank, Washington, in banks on call deposits and received interest during

the previous year relevant for the assessment year 1962-63, and adjusted the interest payable on its loans against the interest received. The

assessee did not offer the interest received by it for assessment on the ground that substantial amounts had been borrowed during the accounting

period for construction purposes and the funds which were not immediately required during the period of construction were invested in call

deposits and it would not be possible or correct to split the interest into two items, viz., interest earned on investment on share capital and

investment of borrowed funds. So long as the interest paid during the construction stage exceeded the interest received during the year, there was

no interest on investment liable to be assessed. The Income Tax Officer, however, held that the interest earned by the assessee on the investment

of borrowed money in call deposits was not liable to be taxed as the interest received was less than the interest paid. But, as regards the interest

earned on call deposits made out of share capital, the same was liable to be taxed under the head ""other sources"".

On the above said facts and circumstances, this Court 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 Income Tax Act, 1961, 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.

In view of the law as declared by the Supreme Court, we are of the view that the finding recorded by the Tribunal necessarily to be set aside

and the same is set aside, by answering the question of law in negative and in favour of the Revenue. Accordingly, the appeals are allowed. No

costs.