Assessee's Interest Income from Share Capital Assessable Separately Under "Other Sources" for AY 1962-63

The court held that the interest earned by the assessee on investment of share capital in call deposits could be assessed separately under the head "Other sources" for the assessment year 1962-63. The court rejected the assessee's argument that interest paid on borrowed funds should be deducted from interest earned, emphasizing that since the factory was not established during the assessment year, there was no business income to offset the interest paid. The court ordered the assessee to pay costs to the Revenue and set the counsel's fee at Rs. 500.

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Issues Involved:
1. Whether the interest earned by the assessee on investment of share capital in call deposits could be assessed separately under the head "Other sources" for the assessment year 1962-63.

Summary:

Issue 1: Assessment of Interest Earned on Investment of Share Capital in Call Deposits

The Income-tax Officer found that the assessee, a public limited company, had invested its paid-up share capital and borrowed funds in call deposits, earning interest. The officer assessed the interest earned on the share capital separately under the head "Other sources," while the interest on borrowed funds was not taxed as it was less than the interest paid.

The Appellate Assistant Commissioner held that the entire interest income, irrespective of its origin, should be assessed under "Other sources" and directed the Income-tax Officer to ascertain the interest earned from both paid-up and borrowed capital. The Tribunal, however, held that the interest earned should be set off against interest payments and capitalized as part of the cost of construction of the factory.

The Revenue argued that the interest income from both paid-up share capital and borrowed funds should be assessed under "Other sources" since the factory was under construction and there was no business income to offset the interest paid on borrowings. The Revenue cited several cases, including *Traco Cable Company Ltd. v. CIT* and *CIT v. New Central Jute Mills Co. Ltd.*, to support their position that interest paid on borrowings should be capitalized and not deducted from interest earned.

The assessee contended that the interest paid on borrowed funds should be allowed as a deduction from the interest earned, citing *CIT v. Rajendra Prasad Moody*. However, the court distinguished this case, noting that the borrowings were for establishing a factory, not for earning interest.

The court concluded that since the assessee had not established its factory during the assessment year, there was no business income to compute, and sections 70 and 71 did not apply. The Tribunal's decision to not assess the interest receipts and capitalize the difference was incorrect. The court answered the question in the negative, holding that the interest earned on investment of share capital in call deposits could be assessed separately under "Other sources" for the assessment year 1962-63. The assessee was ordered to pay costs to the Revenue, with counsel's fee set at Rs. 500.

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