Kisan Sahkari Chini Mills Ltd. vs Commissioner of Income Tax, Lucknow

The present appeal filed u/s 260A has been admitted by this Court vide order dated 30-8-2000 on the following two substantial question of law framed in the memo of appeal:- 1. Whether on the facts and circumstances of the case the interest income earned by the appellant by utilizing borrowed funds is assessable to tax in the hands of the appellant under the head "Income from other sources"?

Whether on the facts and circumstances of the case the interest paid on funds borrowed which were utilized for the purposes of earning of interest to be taxed as income or a fully allowable deduction within the meaning of section 57 of the income tax Act?

The appellant is a Co-operative Sugar Mill and is engaged in the business of manufacture and sale of sugar. During the previous year relevant to the assessment year 1986-87, the appellant-company was in the process of setting-up of a Sugar Mill. It had borrowed funds from the financial institutions for the construction and setting-up of the sugar mill. Till such time, the business of manufacture and sale of sugar commenced. It decided to invest the amount of funds, which it had borrowed in the Bank in order to earn interest. The interest earned was shown under the head "Income from other sources". The appellant had claimed deduction in respect of the interest paid by him on borrowed funds. The remaining amount of interest, which could not be adjusted from the amount of interest earned was capitalized under the head "Pre-operative Expenses". The assessing authority brought to tax all interest income under the head "income from other sources". The claim of deduction towards interest paid on the borrowed amount was disallowed. The appeal preferred by the appellant was rejected, which has also been upheld by the Tribunal.

We have heard Shri Shakheel Ahmad, learned counsel for the appellant and Shri A.N. Mahajan, learned counsel for the respondent.

Learned counsel for the appellant submitted that in order to earn interest on the idle fund, the appellant had invested the same with the Bank and, therefore, the interest paid by it towards borrowed funds should have been allowed u/s 57 of the income tax Act, 1961 while computing income from other sources.

We find that the controversy in hand has been set at rest by the Apex Court in the case of CIT v. Autokast Ltd., (2001) 248 ITR 110 . The Apex Court while reversing the decision of the Kerala High Court in Commissioner of Income Tax Vs. Autokast Ltd., had followed its earlier decision in the case of Tuticorin Alkali Chemicals and Fertilizers Ltd., Madras Vs. Commissioner of Income Tax, Madras, and held that the interest paid on borrowed money could not be allowed as deduction while computing interest earned on F.D. Rs. And investments during the period when the business had not commenced.

In view of the aforesaid decisions, we are of the considered opinion that the Tribunal has rightly applied the decision of the Apex Court in the case of Tuticorin Alkali Chemicals & Fertilizers Ltd. (supra) and its order does not suffer from any legal infirmity. The appeal is, therefore, dismissed.