TaxTMI 
TaxTMI 
2004 (9) TMI 28
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....facts and in the circumstances of the case, the hon'ble Tribunal was justified in holding that there was no nexus between the interest expenditure incurred by the applicant and the interest income received by the applicant by investing the surplus amount out of borrowed fund when the said activity was clearly permissible under the memorandum and articles of association of the applicant? (3) Whether the interest expenditure incurred by the appellant is allowable as a deduction under section 57 of the Income-tax Act, 1961, while computing the interest income sought to be assessed as 'income from other sources' under section 56 as expenditure incurred for earning the income? (4) Whether having regard to the memorandum of association of the appellant and its certificates of incorporation and commencement of business, the transactions relating to borrowing and lending were business operations and the interest paid was allowable as an expenditure incurred for earning the interest income under section 36(1)(iii) of the said Act?" Though a little varied expressions have been used in the appeal, these grounds do not make any distinction to obscure the identity of the grounds, which are o....
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....ent was not made for business purpose; inasmuch as the money was borrowed for the purpose of establishing or constructing a project with the object of carrying on business of manufacturing acrylic fibre. The capital was raised through floating of shares as well as borrowing from the financial institutions. They were not borrowed for the purpose of carrying on the business of lending, i.e., advancement of money. Therefore, there cannot be any commencing of business of lending, i.e., advancement of money out of the sum borrowed for the purpose of construction of the manufacturing unit. Dr. Pal, however, has pointed out that the company had borrowed this amount for the purpose of construction of the project. Since the entire amount was not being utilised, therefore, for the interregnum period the unutilised surplus was invested in business expedience in short-term deposit for earning interest so as to provide a buffer for payment of interest on the idle surplus out of the amount borrowed. At the very outset, in his usual fairness, Dr. Pal has pointed out that his argument is confined only to the interest earned on the amount invested out of the funds borrowed from the financial inst....
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....nded wholly and exclusively for the purpose of earning the interest out of such deposit; on the other hand, this was laid out or expended out of the borrowed capital for the purpose of construction of the project eligible to be capitalised. The borrowing was made not for the purpose of enabling the assessee to carry on its business of lending. Therefore, the investment of unutilised surplus at the hands of the assessee for the time being out of the capital borrowed for the purpose of the project cannot be said to be a part of the assessee's business which was, admittedly, yet to commence. And, as such, the interest paid thereon cannot be said to have been laid out or expended wholly and exclusively for the purpose of the business of earning interest. Thus, it does not qualify under section 36(1) for being eligible for deduction under that head. An income can be charged to tax only under a particular head. Unless the income qualifies under a particular head, it cannot be charged under that particular head. If the income cannot be charged in any particular head provided in section 14 of the Income-tax Act, the income cannot at all be charged. If the income can be charged under a pa....
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....ned vis-a-vis the interest paid. But the question is dependent on the fact whether the assessee had commenced its business. So long the business is not commenced, the interest paid cannot be treated as a revenue expenditure, but to be included in the actual cost for being capitalised as capital expenditure, and, therefore, it could not have been treated to be an expenditure incurred within the meaning of section 57(iii). The character of the interest paid on the borrowed capital has been crystallised in the said decision in Tuticorin Alkali Chemicals and Fertilizers Ltd. [1997] 227 ITR 172 (SC). It was said that even if it may be desirable on the point of equity but even then until the law qualifies it for being eligible, the benefit cannot be available. The taxability of income is not dependent upon its destination or the manner of its utilisation. It has to be seen at the point of accrual. It is not necessary that there should be a direct connection between the interest paid and the interest received for the purpose of claiming benefit under section 57(iii). But still it has to be seen whether this amount has been laid out or expended wholly and exclusively for the purpose of ea....
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....the overdraft did not qualify for deduction under section 57(iii). In CIT v. Bokaro Steel Ltd. [1999] 236 ITR 315, the apex court had also dealt with this similar question at page 321 wherein it was observed that during these assessment years the respondent-assessee had invested the amounts borrowed by it for the construction work which were not immediately required in short-term deposits and earned interest. It was held in these proceedings that the receipt of interest amounts to income of the assessee from other sources. The assessee had not filed any appeal from this finding, which was given against it. In any case, this question is now concluded by the decision of the apex court in Tuticorin Alkali Chemicals and Fertilizers Ltd. v. CIT [1997] 227 ITR 172. In CIT v. Bokaro Steel Ltd. [1999] 236 ITR 315 (SC) also an identical question arose in the case of investment of unutilised part of borrowed capital meant for construction of the project in a situation where the business of the assessee involved in the said case had not commenced. Thus, it appears that the proposition as advanced by Mr. Agarwal seems to be the settled proposition as has been held in those decisions. Dr. Pal....
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....522 may be extracted: "The objects of the company and the powers of the company to be exercised in effecting the objects are different things. Powers are not required to be, and ought not to be, specified in the memorandum. The Act intended that the company, if it be a trading company, should by its memorandum define the trade, not that it should specify the various acts, which it should be within the power of the company to do in carrying on the trade. The Third Schedule of the Act contains model forms of memoranda of association. These ought to be followed. Section 118, sub-section (1), enacts that those forms "or forms as near thereto as circumstances admit" shall be used in all matters to which those forms refer. There has grown up a pernicious practice of registering memoranda of association which, under the clause relating to objects, contain paragraph after paragraph not specifying or delimiting the proposed trade or purpose, but confusing power with purpose and indicating every class of act which the Corporation is to have power to do. The practice is not one of recent growth. It was in active operation when I was a junior at the Bar. After a vain struggle I had to yield ....