Interest earned on bank deposits during the construction period is taxable as income from other sources and is not deductible as expenditure wholly and exclusively incurred for earning such income. The application of the interest income towards construction of the factory does not exempt it from tax.

G.C.Bharuka, J.

1. In this reference application, a statement of case had been called for by this court under Sec. 256(2) of the Income-tax Act, 1961 (hereinafter to be referred to as "the Act" only), for examining the following questions of law, which relate to the assessment year 1972-73:

"(1) Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in deleting Rs. 3,13,014 for the assessment year 1972-73 as income from other sources on account of interest as determined by the Income-tax Officer and confirmed by the Appellate Assistant Commissioner in appeal ?

(2) Whether, on the facts and in the circumstances of the case, the interest earned, taxable as income from the other sources, is subject to a deduction towards the construction of the factory ?"

2. The assessee is a limited company. It was incorporated on September 27, 1965, inter alia, to carry on business as iron founders. In May, 1971, the company offered its shares for subscription by the public, which were heavily over subscribed. The money so received was much in excess of the assessees immediate business needs. Accordingly, the surplus money was deposited with banks on short-term deposits whereby Rs. 3,08,478 was received as interest. In addition to this, the assessee also deposited money with the supplier of steel and those deposits earned interest of Rs. 9,536. Thus the aggregate of interest earned by the assessee amounted to Rs. 3,18,014. .

3. As required under the provisions of the Act, the assessee filed its return on October 9, 1972, declaring its income as nil for the assessment year in question. During the course of assessment, it transpired that the aforesaid interest has been adjusted by the assessee against the expenditure on capital work-in-progress. Before completion of the assessment, on August 14, 1973, the assessee filed a revised return showing a loss of Rs. 1,70,833, This figure was worked out by showing Rs. 3,18,014 as income and Rs. 4,88,847 as expenditure. The Income-tax Officer rejected the plea of expenditure on the ground that the company had not yet commenced business and that the interest earned is income from "other sources". But he allowed a deduction of Rs. 5,000 on ad hoc basis thus determining the taxable income at Rs. 3,13,014. The appeal to the Appellate Assistant Commissioner could not succeed. Thus, the matter was brought before the Tribunal by way of second appeal.

4. The Tribunal, on appraisal of all the materials before it, recorded a finding of fact that, during the period under consideration, the assessee had not commenced any business and it was still in the midst of constructing and completing structures. It also found that the assessee had earned interest to the tune of Rs. 3,18,014, but it estimated the expenditure essential for earning the said interest income at Rs. 50,000 against Rs. 5,000 as assessed by the Income-tax Officer. The Tribunal further proceeded to record that, for the purpose of construction, the assessee had also taken a loan against which it paid Rs. 1,09,308 as interest. The Tribunal found that the interest received by the assessee on short-term bank deposits has been appropriated against the cost of construction by debiting the same in the "capital work-in-progress account". Therefore, keeping in view the provisions of Sec. 4, the charging section of the Act, the Tribunal took the view that the assessee in reality not having earned any income as understood in the commercial sense, cannot be subjected to income-tax by taking into account the interest earned in isolation, without taking into account its application, appropriation and adjustment.

5. Shri Vidyarthi, learned standing counsel appearing for the Department, has submitted that the Tribunal has erred in holding that the amount of interest received on deposits with the bank is not liable to income-tax under the Act because the taxability of a receipt under the Act is not dependent on its subsequen