IMPORTANT POINT
If borrowed capital is used for the purpose of earning income that income will have to be taxed in accordance with law and the fact that the Company will have to pay interest on the money borrowed by it, that cannot be a ground for exemption of interest earned by the company.

Headnote:Taxation-Income Tax Act, 1961-Sections 4, 14-Taxability of income earned by a company-Assessment year 1980-81-For purpose of setting up of factories, company had taken term loans from various banks and financial institutions-Borrowed funds not immediately required kept invested in short term deposits-Interests earned by Company from such deposits-That interest must be treated as revenue receipt and to be taxed accordingly-Any set off or deduction of any expenditure can only be made in accordance with provisions of the Act-Accounting practice cannot override any provision of the Act.
       Held : 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 the 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 fund in its hand 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 . The Company may also, as in this case, keep the surplus fund in short-term deposits in order to earn interest. Such interests will be chargeable under Section 56 of the Act. (Para 12)
       If borrowed capital is used for the purpose of earning income that income will have to be taxed in accordance with law. Income is something which flows from the property. Something received in place of the property will be capital receipt. The amount of interest received by the Company flows from its investments and is its income and is clearly taxable even though the interest amount is earned by utilising borrowed capital. (Para 14)
       It is true that the Company will have to pay interest on the money borrowed by it. But that cannot be a ground for exemption of interest earned by the Company by utilizing the borrowed funds as its income. (Para 15)
       An assessee-company may have raised its capital by issue of shares or debentures or by borrowing. But when that capital or a portion of it was utilised for whatever reason, even for a short period, to earn interest that interest must be treated as revenue receipt and will have to be taxed accordingly. Any set off or deduction of any expenditure can only be made in accordance with the provisions of the Act. (Para 24)
       `Taxation-Income Tax Act, 1961 -Section 4-Taxability-Term income -Interpretation of-Whether a particular receipt is of the nature of income and falls within charge of Section 4 is a question of law-It has to be decided on basis of provisions of the Act-No adjustment can be allowed except in accordance with provisions of the Act-Accountancy practice is not necessarily good law. (Paras 18, 21, 30)

JUDGMENT

Sen, J.-M/s. Tuticorin Alkali Chemicals and Fertilisers Limited (formerly) known as Tuticorin Alkali Limited) was incorporated on 3.12.1971 for the purpose of, inter alia, manufacturing heavy chemicals such as ammonium chloride and soda ash. The trial production of the factories of the Company commenced on 30.6.1982. For the purpose of setting up of the factories, the Company had taken term loans from various banks and financial institutions. That part of the borrowed funds which was not immediately required by the Company was kept invested in short-term deposits with banks. Such investments were specifically permitted by the Memorandum and Articles of Association of the Company.

2. The Company had also deposited certain sums with the Tamil Nadu Electricity Board. It had also given interest-bearing loans to its employees to purchase vehicles. Upto the assessment year 1980-81, interests earned by the Company from the various loans given by the Company and also from the bank deposits were shown as income and was taxed accordingly.

3. For the accounting year ending on 30.6.1981, (assessment year 1982-83), the assessee received a total amount of interest of Rs. 2,92,440/-. In its return of income filed on 22.6.1982, the Company disclosed the said sum of Rs. 2,92,440 as "Income from other sources". It also disclosed business loss of Rs. 3,21,802/-. After setting off the interest income against business loss, the Company claimed the benefit of carry forward of net loss of Rs. 29,360/-.

4. The Company later on realised its mistake and on 26.12.1984, it filed a revised return showing business loss of Rs. 3,21,802/-. It claimed that according to the accepted accounting practice, interest and finance charges along with other pre-production expenses will have to be capitalised, and that, therefore, the interest income of Rs. 2,92,440/- should go to reduce the pre-production expenses (including interest and finance charges), which would ultimately be capitalised. In this connection, the Company highlighted the fact that during the previous year relevant to the assessment year 1982-83, it had incurred a sum of Rs. 1,13,06,068/- as and by way of interest and finance charges, which had to be capitalised along with other pre-production expenses. In other words, according to the assessee, the interest income of Rs. 2,92,440/- was not exigible to tax.

5. The Income Tax Officer rejected the assessee s claim that the interest income was not exigible to tax. The view of the Income Tax Officer was upheld by the Commissioner of Income Tax (appeals). The Company s further appeal to the Income Tax Appellate Tribunal was dismissed.

6. We are also concerned in this case with the assessment year 1983-84. During the previous year relevant to this assessment year, the assessee had received interest income of Rs. 1,08336/-. The assessee filed its return in which it claimed that the interest income of 1,08336/- should go to reduce the pre-production expenses including the interest and finance charges which would ultimately be capitalised. This contention was once again negatived by the Income Tax Officer. The view of the Income Tax Officer was upheld by the Commissioner of Income Tax (Appeals) and the Tribunal. Two applications were made for referring questions of law arising out of the order of the Tribunal as to the right of the Company to treat the receipt of interest on capital account and adjust it against preliminary expenditure incurred by the Company. The attention of the Tribunal was drawn to two conflicting decisions on the point of law involved in this case.

7. The view taken by the Madras High Court in the case of v. Seshasayee Paper and Boards Ltd. Commissioner of Income Tax 1, was that the interest earned by the assessee on investment of share capital in call deposits even before production commenced could be assessed separately under the head "Other Sources". The Andhra Pradesh High Court took a contrary view in the case of CIT v. Nagarjuna

Click Here to Read the rest of this document

1997 Supreme(SC) 902

IMPORTANT POINTIf borrowed capital is used for the purpose of earning income that income will have to be taxed in accordance with law and the fact that the Company will have to pay interest on the money borrowed by it, that cannot be a ground for exemption of interest earned by the company.

Cases Referred (2)

IMPORTANT POINT
If borrowed capital is used for the purpose of earning income that income will have to be taxed in accordance with law and the fact that the Company will have to pay interest on the money borrowed by it, that cannot be a ground for exemption of interest earned by the company.