2002 (9) TMI 288 - AT - Income Tax

Tribunal upholds AO's decision on interest income, denies exemption

The Tribunal upheld the Assessing Officer's decision to assess interest income of Rs. 99,20,138 and Rs. 66,51,224 under the head 'income from other ... - Issues Involved:1. Taxability of interest income of Rs. 99,20,138 shown in the P&L account.2. Taxability of interest income of Rs. 66,51,224 not shown in the P&L account.3. Allowance of interest paid on borrowings against interest income.4. Applicability of the Tuticorin Alkali Chemicals & Fertilizers Ltd. case to the facts of the assessee's case.Detailed Analysis:Issue 1: Taxability of Interest Income of Rs. 99,20,138 Shown in the P&L AccountThe assessee, a wholly-owned company of the Government of Maharashtra, engaged in plantation activity, received Rs. 99,20,138 as interest income, which was shown in the P&L account. The assessee claimed that this interest income should be construed as income from agriculture, which is exempt from tax. The details of the interest income were from various sources such as savings bank accounts, short-term deposits, vehicle advances, and house building advances.The AO held that the immediate source of income must be land to treat it as agricultural income. Relying on the decision of the Privy Council in CIT vs. Raja Bahadur Kamakhaya Narayan Singh, the AO concluded that the interest income earned by the assessee is neither revenue derived from agriculture nor connected with any process of agriculture. Consequently, the interest on short-term deposits was assessed under the head 'income from other sources,' while interest from savings bank accounts, vehicle advances, and house building advances was assessed as non-agricultural business income.Issue 2: Taxability of Interest Income of Rs. 66,51,224 Not Shown in the P&L AccountThe assessee received Rs. 66,51,224 as interest income from investments made from idle funds received from the Government and World Food Project. This interest income was not shown in the P&L account but was credited to the respective project's accounts to reduce the project cost. The AO called upon the assessee to explain why this interest income should not be treated as income of the assessee and why the accounting practice was changed.The assessee argued that the projects involved long gestation periods and followed a policy to charge interest expenditure to the capital account of the plantation activities. The interest earned on unutilized funds during this period was credited to the capital asset of the particular scheme instead of treating it as revenue income. The AO, relying on the decision of the Supreme Court in Tuticorin Alkali Chemicals & Fertilizers Ltd. vs. CIT, held that the interest earned out of unutilized funds remains revenue in character and is assessable under the head 'Income from other sources.'Issue 3: Allowance of Interest Paid on Borrowings Against Interest IncomeThe assessee contended that the interest paid on borrowings should be allowed as a deduction against the interest income earned. The learned Departmental Representative relied on the decision of the Indore Bench in Mandideep Engg. & Packaging Industries (P) Ltd. vs. Dy. CIT, which held that interest paid could not be termed as expenditure incurred wholly and exclusively for earning income from other sources.The Tribunal, considering various decisions, concluded that the interest paid on borrowed funds could not be allowed as a deduction against interest income from other sources unless the borrowed funds were exclusively used for earning that interest income. The Tribunal upheld the Revenue authorities' decision to reject the assessee's claim for deduction of interest paid on borrowings.Issue 4: Applicability of the Tuticorin Alkali Chemicals & Fertilizers Ltd. CaseThe assessee argued that the decision in Tuticorin Alkali Chemicals & Fertilizers Ltd. vs. CIT was not applicable as the assessee had commenced its business. The learned Departmental Representative, however, contended that the principles laid down in Tuticorin Alkali Chemicals & Fertilizers Ltd. would apply regardless of whether the business had commenced or not.The Tribunal referred to the decision of the Madras High Court in South India Shipping Corporation Ltd. vs. CIT, which held that the law laid down in Tuticorin Alkali Chemicals & Fertilizers Ltd. was not confined to cases where a company had not commenced business. The Tribunal concluded that the interest income earned by the assessee from short-term deposits and other sources should be assessed under the head 'income from other sources,' and the decision in Tuticorin Alkali Chemicals & Fertilizers Ltd. was applicable to the assessee's case.Conclusion:The Tribunal upheld the AO's decision to assess the interest income of Rs. 99,20,138 and Rs. 66,51,224 under the head 'income from other sources' and rejected the assessee's claims for exemption and deduction of interest paid on borrowings. The appeal by the assessee was dismissed.