JUDGMENT R.K. Agrawal, J.
The Income Tax Appellate Tribunal, New Delhi has referred the following question of law under section 256(1) of the Income Tax Act, 1961, hereinafter referred to as the Act, for opinion to this Court.
"Whether on the facts and in the circumstances of the case, the Tribunal was right in holding that interest of Rs. 2,54,279 was assessable as assessee's income for assessment year 1978-79 ?"
Briefly stated the facts giving rise to the present reference are as follows:
2. The reference relates to the assessment year 1978-79. The applicant is a public limited company incorporated under the provisions of the Companies Act, 1956. It is a Government Company. It was incorporated in the year 1974. It is engaged in the business of manufacturing sugar by vacuum pan process. During the accounting year under consideration ending on 31-3-1978 the applicant which was in the process of setting up sugar mill had borrowed funds from Industrial Finance Corporation, Indian Overseas Bank, U.P. State Sugar Corporation, etc. on which it had paid interest of Rs. 9,13,380. A part of the funds so received was deposited in short term deposits with the banks on which the applicant earned interest of Rs. 2,64,279. The applicant claimed that the said interest receipts should be set off against the interest payments made by it and, therefore, no interest income was assessable in its hands. The Income Tax Officer, however, rejected the claim by holding that the interest of Rs. 2,64,279 earned by the applicant was assessable under the head 'income from other sources' and only the expenditure laid out or expended wholly or exclusively for the purposes of making or earning such interest income was allowable as deduction against the interest income. In the appeal preferred by the applicant, the Commissioner of Income Tax (Appeals) had deleted the addition by holding that only net amount of interest payable against loans taken for installation of plant and machinery was includible in the total cost of construction and as the assessee had paid, interest on the borrowed funds a part of which had been deposited with the bank, only the net result in the interest account should be seen. The revenue preferred an appeal before the Tribunal. The Tribunal had reversed the order passed by the Commissioner of Income Tax (Appeals). It had held that this amount of interest in question was assessable under the head 'Incomes from other sources.'
2. The reference relates to the assessment year 1978-79. The applicant is a public limited company incorporated under the provisions of the Companies Act, 1956. It is a Government Company. It was incorporated in the year 1974. It is engaged in the business of manufacturing sugar by vacuum pan process. During the accounting year under consideration ending on 31-3-1978 the applicant which was in the process of setting up sugar mill had borrowed funds from Industrial Finance Corporation, Indian Overseas Bank, U.P. State Sugar Corporation, etc. on which it had paid interest of Rs. 9,13,380. A part of the funds so received was deposited in short term deposits with the banks on which the applicant earned interest of Rs. 2,64,279. The applicant claimed that the said interest receipts should be set off against the interest payments made by it and, therefore, no interest income was assessable in its hands. The Income Tax Officer, however, rejected the claim by holding that the interest of Rs. 2,64,279 earned by the applicant was assessable under the head 'income from other sources' and only the expenditure laid out or expended wholly or exclusively for the purposes of making or earning such interest income was allowable as deduction against the interest income. In the appeal preferred by the applicant, the Commissioner of Income Tax (Appeals) had deleted the addition by holding that only net amount of interest payable against loans taken for installation of plant and machinery was includible in the total cost of construction and as the assessee had paid, interest on the borrowed funds a part of which had been deposited with the bank, only the net result in the interest account should be seen. The revenue preferred an appeal before the Tribunal. The Tribunal had reversed the order passed by the Commissioner of Income Tax (Appeals). It had held that this amount of interest in question was assessable under the head 'Incomes from other sources.'
3. We have heard Sri Vikram Gulati, learned counsel for the applicant and Sri A.N. Mahajan, learned Standing counsel appearing for the revenue.
3. We have heard Sri Vikram Gulati, learned counsel for the applicant and Sri A.N. Mahajan, learned Standing counsel appearing for the revenue.
4. Learned counsel for the applicant submitted that the applicant was in the process of setting up a sugar mill for which purpose it had borrowed funds from various financial institutions, corporations and banks. In order to use the idle money so as to minimize the cost of construction by reducing its liability towards interest, as a prudent person the applicant had invested this surplus and idle funds in short term deposits with the banks on which it had earned interest. The amount of interest so earned is to be deducted from the amount of interest which the applicant had to pay on its borrowings and, therefore, there was no income. The Tribunal had committed an error in holding it to be assessable under the head 'income from other sources'.
4. Learned counsel for the applicant submitted that the applicant was in the process of setting up a sugar mill for which purpose it had borrowed funds from various financial institutions, corporations and banks. In order to use the idle money so as to minimize the cost of construction by reducing its liability towards interest, as a prudent person the applicant had invested this surplus and idle funds in short term deposits with the banks on which it had earned interest. The amount of interest so earned is to be deducted from the amount of interest which the applicant had to pay on its borrowings and, therefore, there was no income. The Tribunal had committed an error in holding it to be assessable under the head 'income from other sources'.
5. In support of his aforesaid submission he relied upon the following decisions:-
5. In support of his aforesaid submission he relied upon the following decisions:-
1. India Cements Ltd. v. CIT(I966) 60 1TR 52 (SC)
2. Challapalli Sugar Ltd. v. CIT (I975) 98 ITR 167 (SC)
3. Addl. CIT v. Indian Drugs & Pharmaceuticals Ltd. (1983) 141 ITR 134 (Delhi)
4. CIT v. Paramount Premises (P.) Ltd. (1991) 190 ITR 259 (Bom.)
5. CIT v. Tirupati Woollen Mills Ltd. (1992) 193 ITR 252 (Cal.).
6. Sri A.N. Mahajan, the learned Standing counsel appearing for the revenue, however, submitted that in respect of interest income under section 14 of the Act, heads of income have been specified and all income have been classified under the various heads. Head F specifies 'Income from other sources'. According to him, under section 56 of the Act, income which do not fall under Head A to E of section 14 of the Act, are chargeable under the Head F - 'Income from other sources'. He submitted that interest income would also fall under section 56 of the Act. He relied upon the following decisions:-
6. Sri A.N. Mahajan, the learned Standing counsel appearing for the revenue, however, submitted that in respect of interest income under section 14 of the Act, heads of income have been specified and all income have been classified under the various heads. Head F specifies 'Income from other sources'. According to him, under section 56 of the Act, income which do not fall under Head A to E of section 14 of the Act, are chargeable under the Head F - 'Income from other sources'. He submitted that interest income would also fall under section 56 of the Act. He relied upon the following decisions:-
1 . CIT v. New Central Jute Mills Co. Ltd. (1979) 118 ITR 1005 (Cal.)
2. Addl. CIT v. Madras Fertilisers Ltd. (1980) 122 ITR 139 (Mad.)
3. CED v. Smt. Kalawati Devi ( 1980) 125 ITR 762
4. Addl. CIT v. Indian Drugs & Pharmaceuticals Ltd. (1983) 141 ITR 134 (Delhi)
5. Tuticorin Alkali Chemicals & Fertilizers Ltd v. CIT (1997) 227 ITR 172 (SC)
6. CIT v. Coromandal Cements Ltd. (1998) 234 ITR 412 (SC).
7. Even though a large number of decisions have been cited by the Counsel for the parties we find that the Apex Court in the case of Tuticorin Alkali Chemicals & Fertilizers Ltd. (supra) has held that interest earned on surplus funds kept in short term deposits is chargeable under section 56 of the Act. The Apex court has held as follows:-
7. Even though a large number of decisions have been cited by the Counsel for the parties we find that the Apex Court in the case of Tuticorin Alkali Chemicals & Fertilizers Ltd. (supra) has held that interest earned on surplus funds kept in short term deposits is chargeable under section 56 of the Act. The Apex court has held as follows:-
"The basic proposition that has to be borne in mind in this case is that it is possible for a company to have six different sources of income, each one of which will be chargeable to income tax. Profits and gains of business or profession is only one of heads under which the company's income is liable to be assessed to tax. If a company has not commenced business, there cannot be any question of assessment of its profits and gains of business. That does not mean that until and unless the company commences its business, its income from any other source will not be taxed. If the company, even before it commences business, invests the surplus funds in its hands for purchase of land or house property and later sells it at profit, the gain made by the company will be assessable under the head "Capital gains". Similarly, if a company purchases a rented house and gets rent, such rent will be assessable to tax under section 22 as income from house property. Likewise, a company may have income from other sources. It may buy shares and get dividends. Such dividends will be taxable under section 56 of the Act. The company may also, as in this case, keep the surplus funds in short-term deposits in order to earn interest. Such interest will be chargeable under section 56 of the Act." (p. 179)
8. The aforesaid decision has subsequently been followed by the Apex court in the case of Coromandal Cements Ltd. (supra), CIT v. Bokaro Steel Ltd. (1999) 236 ITR 315 at page 321 (SC) and CIT v. Autokast Ltd. (2001) 248 ITR 110 (SC).
8. The aforesaid decision has subsequently been followed by the Apex court in the case of Coromandal Cements Ltd. (supra), CIT v. Bokaro Steel Ltd. (1999) 236 ITR 315 at page 321 (SC) and CIT v. Autokast Ltd. (2001) 248 ITR 110 (SC).
9. In this view of the matter the interest earned by the applicant has rightly been held to be its income and taxable under the head 'Income from other sources'.
9. In this view of the matter the interest earned by the applicant has rightly been held to be its income and taxable under the head 'Income from other sources'.
10. In view of the forgoing discussion, we answer the question of law referred to us in the affirmative i.e., in favour of the revenue and against the assessee. However, there shall be no order as to costs.
10. In view of the forgoing discussion, we answer the question of law referred to us in the affirmative i.e., in favour of the revenue and against the assessee. However, there shall be no order as to costs.