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Issues: Whether interest earned on short-term bank deposits made during the construction period was taxable as income from other sources, and whether the interest paid on borrowed funds could be deducted against such interest income on the basis of nexus between the borrowings and the deposits.
Analysis: The deposits were not held to have any connection with the construction activity so as to exclude the interest from taxation. The claim for set-off of interest paid on borrowings was rejected because section 57(iii) of the Income-tax Act, 1961 requires expenditure to be laid out wholly and exclusively for the purpose of making or earning the income in question. Mere utilisation of borrowed funds in short-term deposits during an intervening period was held insufficient, since the borrowings were for construction and not for investment in income-yielding assets. The decision also noted that interest on borrowed funds till commencement of business is ordinarily required to be capitalised, and that the statutory language supports only expenditures directly referable to earning the relevant income.
Conclusion: The interest earned on short-term deposits during construction was taxable as income from other sources, and the interest paid on borrowed funds was not allowable as a deduction against that income.
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