Commissioner Of Income-Tax v. Bihar Alloy Steels Ltd.

G.C Bharuka, J.:— In this reference application, a statement of case had been called for by this court under section 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 assessee's 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. 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.

3. 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 section 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.

4. 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 subsequent application. His further submission was that, under section 57(iii) of the Act, deduction from income chargeable under the head “Income from other sources” can be made only in respect of such expenditures which are not capital in nature and have been laid out or expended wholly and exclusively for the purpose of making or earning such income, which is not the situation here. In support of his submissions, he has placed reliance on the decision in the cases of Commissioner Of Income-Tax, Bombay City-Ii v. United Wire Ropes Ltd., [1980] 121 ITR 762 (Bom) and Additional CIT v. Madras Fertilisers Ltd., [1980] 122 ITR 139 (Mad).

5. Shri Pawan Kumar, learned counsel appearing for the assessee, has strenuously argued that the view taken by the Tribunal is in conformity with the decision of this court in the case of CIT v. Bokaro Steel Ltd. (No. 1), [1988] 170 ITR 522 and, as such, the same should be affirmed. According to him, in a case like the present one, the brochure (Study on Expenditure During Construction Period) issued by the Institute of Chartered Accountants of India and published in December, 1970, should be accepted as laying down the guiding principle which, while dealing with the “Income during construction or production period”, has said that “similarly, interest income earned during construction period may be set off against interest expenses incurred during this period”.

6. After hearing learned counsel for the parties and perusing the order of the Tribunal, I am of the opinion that the legal issues involved in the present case have been approached by the Tribunal more through accounting and commercial practice based on practical convenience than by adhering to the legal principles emanating from the provisions of the Act. The discussions made hereunder will duly substantiate it.

7. It is an admitted position that, during the period under consideration, the company had not commenced its business and its plant and building were under construction. It is also not in dispute that it had earned Rs. 3,18,014 by way of interest from bank deposits and it had been debited in the “capital work-in-progress account”. The order of the Tribunal also shows that the assessee had paid Rs. 1,09,308 as interest on borrowings obtained for the purpose of construction. Keeping in view these foundational facts, the various facets of the question which fall for our consideration are : (i) Whether the interest received by the assessee from the bank can be at all termed as income under the Act; (ii) if it is income, whether any deduction is allowable therefrom; and (iii) whether the said interest income is at all taxable since its application had reduced the cost of construction or it was utilised for the purpose of construction.

8. Section 4 of the Act is the charging section and sub-section (1) thereof reads as under:

“Where any Central Act enacts that income-tax shall be charged for any assessment year at any rate or rates, income-tax at that rate or those rates shall be charged for that year in accordance with, and subject to the provisions of, this Act in respect of the total income of the previous year or years, as the case may be, of every person:

Provided that where by virtue of any provision of this Act, income-tax is to be charged in respect of the income of a period other than the previous year, the income-tax shall be charged accordingly.”

9. Therefore, tax under the Act is leviable on the total income of the previous year to be computed in accordance with the provisions of the Act.

10. The inclusive definition of “income” as set out under section 2(24) of the Act takes within its sweep various profits and receipts. In the case of Go-pal Saran Narain Singh (Maharajkumar) v. CIT, [1935] 3 ITR 237, at page 242, it has been held by the Privy Council that “anything which can properly be described as income is taxable under the Act unless expressly exempted”.

11. Keeping in view the facts and the meaning of “income” as discussed above, it needs no further elaboration to hold that the bank interest received in this case is “income from other sources” within the meaning of section 56 of the Act since income is not chargeable under any other head of income specified in section 14 of the Act. If that be so, the assessee will be entitled to deduction from this income only if the conditions laid down under section 57(iii) of the Act are satisfied which reads as under:

“57. The income chargeable under the head ‘Income from other sources’ shall be computed after making the following deductions, namely:— ….

(iii) any other expenditure (not being in the nature of capital expenditure) laid out or expended wholly and exclusively for the purpose of making or earning such income.”

12. The language of the aforementioned section is clear, explicit and clinches the issue involved.

13. On a reading of section 4 with section 57(iii) of the Act, there is no escape from taking the view that expenditure is allowable as deduction out of an “income from other sources” only if it is found that, in fact, (i) it has been expended wholly and exclusively for the purpose of making or earning such income; and (ii) it is not in the nature of capital expenditure.

14. In the present case, apart from the fact that the assessee has paid certain interest on the borrowings obtained for the purpose of construction, nothing has been found even by the Tribunal that the said amount of interest on borrowings has been paid wholly and exclusively for the purpose of earning the bank interest in question. In fact, the amount on which the bank interest was earned has absolutely no connection with the amounts which were borrowed and spent on construction. The matter would have been different if part of the unutilised borrowings had been temporarily deposited with banks which would be yielding interest. But that is not the situation here. Therefore, section 57(iii) of the Act does not permit any deduction as claimed by the assessee, and beyond this provision, there is no other provision under the Act which enables the assessee to claim any deduction in respect of the bank interest earned by it.

15. Coming to the next facet of the question, it is to be seen whether application of the interest income or its mode of accounting can make it exempt. In my opinion, seeking of an answer to the question does not pose any difficulty. There is no provision under the Act providing therein that the income from other sources will cease to be taxable if it is applied in acquisition of capital assets. Therefore, merely because the interest income has been appropriated or adjusted towards construction of the plant or building, it does not cease to be income liable to tax under the Act. It may be true that, on balancing the accounts, such interest may be found to be reducing the cost of construction in the sense that it provides additional resources for capital investment but that will be always true if any income earned through any source is applied in construction or acquisition of capital assets.

16. Under the scheme of the Act, the application of income per se does not affect its taxability except for specific provisions in this regard. Incidently, I may also notice here that, in view of the law laid down by the Supreme Court in the case of Challapalli Sugars Ltd. v. CIT, [1975] 98 ITR 167, interest paid on amounts borrowed by the assessee for the acquisition and installation of plant and machinery, before the commencement of production, forms part of the “actual cost” of the asset to the assessee and, as such, it is capital expenditure. Accordingly, interest paid by the assessee in the present case being capital in nature, it cannot be allowed as deduction in computing the income of the assessee.

17. The submissions of Mr. Pawan Kumar that, since the brochure of the Institute of Chartered Accountants, referred to above, provides that the interest income earned during the construction period may be set off against expenses incurred during the said period, the same principle should be applied for computing the taxable income, needs to be considered now. By referring to Challapalli Sugars Ltd.'s case, [1975] 98 ITR 167 (SC), at page 173, he has submitted that even the Supreme Court has taken aid from the guidelines laid down in the said brochure for ascertaining the true import and meaning of the word “actual cost” for the purpose of section 10 of the Indian Income-tax Act, 1922. In my opinion, this submission has got to be rejected for two reasons. Firstly, the Supreme Court, in the case of Challapalli Sugars Ltd., [1975] 98 ITR 167, has taken aid from the various expert reports and opinions to ascertain the meaning of the word “actual cost”, since the said phrase has not been defined in the Act. According to their Lordships, keeping in view the settled canons of interpretation, the word is required to be “construed in the sense which no commercial man would misunderstand”. This is not the situation here. No statutory expression as such has fallen for our consideration which necessitated the application of the said principle. Moreover, the principles of commercial accounting cannot determine or affect the range of taxable income or ambit of taxation because the tax liability under the Act is to be governed by the provisions of the Act and not by the principles laid down for maintaining the accounts even by an expert body or the actual method of maintaining the accounts.

18. In the case of CIT v. Shoorji Vallabhdas and Co., [1962] 46 ITR 144, it has been held by the Supreme Court that (headnote):

“Income-tax is a levy on income. Though the Income-tax Act takes into account two points of time at which the liability to tax is attracted, viz., the accrual of the income or its receipt, yet the substance of the matter is the income. If income does not result at all, there cannot be a tax, even though in book-keeping, an entry is made about a ‘hypothetical income’ which does not materialise. Where income has, in fact, been received and is subsequently given up in such circumstances that it remains the income of the recipient, even though given up, the tax may be payable. Where, however, the income can be said not to have resulted at all, there is obviously neither accrual nor receipt of income, even though an entry to that effect might, in certain circumstances, have been made in the books of account.”

19. In the above view of the matter, the brochure of the Institute of Chartered Accountants, referred to above, is of no avail to the assessee.

20. In the present case, it is not necessary to deal individually with all the decisions cited at the Bar because in my opinion, so far as this court is concerned, the issue is now no more res integra since a similar question has been specifically dealt with by a Bench of this court in the case of Bokaro Steel Ltd. v. CIT (No. 2), [1988] 170 ITR 545. In this case, the assessee had received sums from the Government for the construction of its plant. The unutilised part of the sums so received used to be deposited in banks on short-term deposits and earned interest thereon. On this fact, the question which had fallen for consideration before this court was as to whether the interest so received was liable to be assessed as income of the assessee or such interest should reduce the cost of construction of the assessee and, therefore, would not constitute income. This is question No. 4 at page 547 of the said report. This court, after considering various authorities on the issue, answered the question against the assessee by holding that the interest so received constitutes the income of the assessee.

21. In the above view of the matter, both the questions referred to us are answered in the negative, i.e, against the assessee and in favour of the Department. Anyhow, there will be no order as to costs. Let a copy of this order be sent to the Income-tax Appellate Tribunal, Patna Bench, for passing appropriate orders in terms of section 260 of the Act.

Aftab Alam, J.:— I agree.