TaxTMI 
TaxTMI 
TaxTMI 
2012 (9) TMI 728
X X X X Extracts X X X X
X X X X Extracts X X X X
....rces and not the business income. The ld. CIT/DR also preferred written submissions in which certain judicial pronouncements have been relied upon. 3. We have considered the rival submissions and perused the material available on record. The facts, in brief, are that the learned Assessing Officer, during the assessment proceedings, noted that in computation of total income of the assessee, an amount of Rs. 74,94,21,146/- was offered, and claimed deduction of Rs. 31,39,70,137/-, being interest, earned on FDRs prior to commencement of business from debenture loans. The Assessing Officer asked the justification of such deduction. The assessee placed reliance upon the decision from Hon'ble Madras High Court in the case of VGR Foundations (supra) and claimed that the deduction was rightly claimed. The Assessing Officer further noted that the assessee company, in earlier years, issued convertible zero coupon debentures to BPCL which were convertible into equity shares within a period of 36 years. The amount of Rs. 90 crores was received as debenture loans in earlier years. The claim of the assessee is that the interest of Rs. 31,39,70,137/- was earned from FDRs made from such debenture ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e from other sources which was affirmed by AAC and the Tribunal. On reference to the Hon'ble High Court, it was held that "deposit of share capital in a bank cannot be said to be an act of money lending and hence the interest income was assessable as income from other sources u/s 56 of the Income Tax Act, 1961 and not as a business income u/s 28 of the Act. The Hon'ble Kerala High Court in GTN Textiles Limited vs. DCIT (2010) 326 ITR 352 (Ker) held that interest from share application money placed in deposit and interest thereon is income from other sources. While coming to this conclusion, the Hon'ble High Court followed the decision in Brooke Bond India Limited; 225 ITR 798 (SC) and Tuticorin Alkalies Chemicals & Fertilizers Limited (supra). In the case of Tuticorin Alkalies Chemicals & Fertilizers Limited (supra), wherein interest was earned from investment of borrowed funds prior to commencement of business, such interest was held to be assessable under the Income Tax Act. It was held that no deduction or set off is permissible against such interest. The relevant portion from the order is reproduced hereunder :- " Interest income is always of a revenue nature, unless it is re....
X X X X Extracts X X X X
X X X X Extracts X X X X
....stments and is its income and is clearly taxable even though the interest amount is earned by utilizing borrowed capital. It is true that the company will have to pay interest on the money borrowed by it. But that cannot be a ground for exemption of interest earned by the company by utilizing the borrowed funds as its income. Any set-off or deduction of any expenditure can only be made in accordance with the provisions of the Act." The Hon'ble Delhi High Court in the case of CIT vs. Modi Rubber Limited; 208 ITR 379 wherein the money received from share holders towards share capital was deposited in banks and earned interest from such deposits, held the same to be income from other sources. While coming to this conclusion, the Hon'ble Court distinguished the decision in Challapalli Sugars Limited vs. CIT; 98 ITR 167 (SC) and further held that the observation in CIT (Addl.) vs. Indian Drugs & Pharmaceuticals Limited (1983) 141 ITR 134 (Del), though obiter, but held the correct law (see page 393A). While coming to this conclusion, the Hon'ble Court also considered following judicial pronouncements :- a. Madhya Pradesh State Ind. Corpn.Ltd.; 69 ITR 824 (MP) b. Traco Cable Com.Ltd.....
X X X X Extracts X X X X
X X X X Extracts X X X X
....o the assessee by the subsidiary company. The disallowance towards expenditure claimed for raising share capital was confirmed by the Tribunal. Since the assessee was not engaged in financing, the interest on short term deposit was rightly assessed as income from other sources. While coming to this conclusion, the Hon'ble Court followed the decision in Brooke Bond India Limited vs. CIT; 225 ITR 798 (SC) and Tuticorin Alkalies Chemicals & Fertilizers';227 IT 172 (SC). Even otherwise, the decision of Hon'ble jurisdictional High Court in 69 ITR 824 is of binding nature, consequently, we are of the considered opinion that the interest of Rs. 31,39,70,137/-, earned on FDRs, prior to commencement of business, from the fund of debenture loans, amounting to Rs. 900 crores, is clearly an income from other sources and not the business income. 3.3 The question of adjustment of interest payable by the company against the interest earned by it depends upon the provision of the Act. The expenditure would have been deductible as incurred for the purposes of business if the assessee's business had commenced. However, that is not the case here. So far as the scope of the provision of section 56 o....