2004 (10) TMI 66

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....en by the company? 3. Whether, on the facts and in law and in the circumstances of the case, the Tribunal was legally right in holding that the interest pay able to the U.P. Government on seed loan taken was not deductible from the interest earned from the investments of the same loan by the appellant?" Briefly stated the facts giving rise to the present reference are as follows: The applicant is a company incorporated under the provisions of the Companies Act, 1956. It is a Government of U.P. undertaking. For the assessment year 1977-78 for which the previous year is the financial year, the Income-tax Officer completed the assessment vide order dated December 31, 1977, determining the total income at Rs. 1,40,552. In the said assessment, the Income-tax Officer while computing interest under the head "Income from other sources" allowed the deduction of Rs. 10,417 being the amount of interest paid by the applicant to the U.P. Government in respect of "seed loan for industrial estate". Subsequently, he came across a decision of the Calcutta High Court in the case of CIT v. New Central Jute Mills Co. Ltd. [1979] 118 ITR 1005 and on the basis of the information as to the legal....

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.... applicant in view of the decision of the Calcutta High Court in the case of New Central Jute Mills Co. Ltd. [1979] 118 ITR 1005. In support of his aforementioned submission he has relied upon the following decisions: (1) CIT v. New Central Jute Mills Co. Ltd. [1979] 118 ITR 1005 (Cal); and (2) Phool Chand Bajrang Lal v. ITO [1993] 203 ITR 456 (SC). Having heard learned counsel for the parties we find that admittedly the Income-tax Officer had allowed deduction of Rs. 10,417 which was towards the interest paid to the State Government in respect of "seed loan for industrial estate" from the interest income computed under the head "Income from other sources". In the case of New Central Jute Mills Co. Ltd. [1979] 118 ITR 1005 the Calcutta High Court has held that interest paid to the Government towards the loan obtained for erection of chemical plant pending starting of business cannot be allowed as revenue expenditure. The principles laid down by the Calcutta High Court do constitute information on a point of law which should be taken into consideration by the Income-tax Officer in forming his belief that the income to that extent had escaped assessment to tax. In t....

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....r exposition set forth in a judgment of a court or the order of a Tribunal in itself bears the character of law. Thus, if on the plain language of section 57 of the Act an expenditure which has not been incurred exclusively for earning the income which is to be assessed under the head "Income from other sources" the deduction has been allowed and subsequently in view of the law laid down by one of the High Courts, the Income-tax Officer gets the information to form the opinion on a point of law in that event it cannot be said that the proceeding under section 147(b) of the Act cannot be initiated. In this view of the matter the Tribunal has rightly upheld the initiation of the proceedings under section 147(b) of the Act. So far as the question of deduction of interest expenditure of Rs. 10,417 is concerned admittedly the industrial estate had not come into existence during the assessment year in question. The applicant had paid interest in respect of "seed loan for industrial estate" to the State Government. It was not expenditure for earning interest. In the case of G.J. Coelho [1964] 53 ITR 186, the apex court has held that in principle there is no distinction between inter....

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....hases a rented house and gets rent, such rent will be assessable to tax under section 22 as income from house property. Likewise, a company may have income from other sources. It may buy shares and get dividends. Such dividends will be taxable under section 56 of the Act. The company may also, as in this case, keep the surplus funds in short-term deposits in order to earn interest. Such interest will be chargeable under section 56 of the Act." The apex court has further held that the question of adjustment of interest payable by the company against the interest earned by it will depend upon the provisions of the Act. The expenditure would have been deductible as incurred for the purpose of business if the assessee's business had commenced. The assessee may be entitled to capitalize the interest payable by it but what the assessee cannot claim is adjustment of this expenditure against interest assessable under section 56. Section 57 of the Act sets out in its clauses (i) to (iii) the expenditures which are allowable as deduction from income assessable under section 56. The apex court has further held as follows: "There are specific provisions in the Income-tax Act for setti....