TaxTMI 
TaxTMI 
1995 (3) TMI 46
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....a limited company and was incorporated on October 27, 1976. The certificate of commencement of business was issued by the Registrar of Companies on January 19, 1977, and the company was granted the consent by the Controller of Capital Issues on July 27, 1978. The prospectus for the raising of capital from the public was issued on November 18, 1977. The loans were obtained from the financial institutions as well as from other parties for the purchase of capital equipment and for setting up the business of the company, which was manufacturing cement. The company has paid interest on all its borrowings. Besides the loan, the company has also received the application money for issue of share certificates and the application money so received was deposited with the bank as short-term deposit besides part of the borrowings. On such deposit, the company earned an interest of Rs. 2,58,089. On the other hand, the amount of interest paid by the company on its borrowings was Rs. 14,32,072. The amount of Rs. 2,58,089 was deducted from the interest paid and the balance amount of interest was treated as part of the capital cost of the building, plant and machinery, etc. The submission of the ass....
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....amil Nadu Industrial Development Corporation Ltd. [1991] 189 ITR 670 and CIT v. Seshasayee Paper and Boards Ltd. [1985] 156 ITR 542 in which the Madras High Court has taken the view that unless the assessee had established its factory, there would be no question of computing its business income during the year and the interest earned by the assessee could be assessed separately under the head "Other sources". The decision of the Andhra Pradesh High Court in the case of CIT v. Nagarjuna Steels Ltd. [1988] 171 ITR 663 was taken into consideration where the surplus fund was kept on short-term deposits and the interest so earned was considered to be set off against the interest paid by the assessee on the loans obtained and the balance interest was considered to be capitalised. The interest received on the short-term deposit was held not assessable as revenue receipt. The view taken by the Andhra Pradesh High Court was followed by the Orissa High Court in this case. We have considered over the matter. The provisions of section 56 provide that income of every kind, which is not to be excluded from the total income under this Act shall be chargeable to income-tax under the head "Income ....
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....question under which head an income comes cannot depend on when it was received. The provisions of section 14 make it clear that all the different sources of income which have been treated under the Act separately and when the income from interest received on short-term deposit falls under the head "Income from other sources" then it has to be treated separately under such head. In CIT v. Seshasayee Paper and Boards Ltd. [1985] 156 ITR 542 referred to above, the Madras High Court has considered the claim of adjustment of interest payable on loans against the interest received on call-deposits in bank. The factory was not established and, therefore, it was observed that there is no question of computation of business income in that year. The High Court came to the conclusion that the interest earned by the assessee on investments/call-deposits could be assessed separately under the head "Other sources" and could not be adjusted against the interest paid to the financial institutions in respect of the loans obtained. The Karnataka High Court in the case of CIT v. Cap Steel Ltd. [1986] 162 ITR 533 came to the conclusion that the capitalisation of the interest on loan could be of gros....
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....April 5, 1994, has held as under (at page 603) : " (i) interest on fixed deposits and other deposits before the commencement of the business is income from other sources ; (ii) income from interest on deposits of surplus money during the construction period is also to be considered/treated as income from other sources ; (iii) interest income in respect of surplus money, not required for business and deposited in bank or person, as idle money, for safe keeping, would be assessable as income from other sources. If the income from interest is from a fund which has been brought as surplus capital, it would be assessable as income from other sources ; (iv) in respect of investment of surplus funds, there is divergence of opinion between different High Courts and this court, in the case of Murli Investments Co., held that if the surplus funds are invested instead of keeping them idle, the income by way of interest should be treated as income from other sources ; (v) if the surplus funds emerge out of business carried on by the assessee which is regularly carried on by the assessee and then with the intention to carry on the business of lending of money or money-lending the loan i....
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....has to be dealt with in accordance with the provisions of the Act. (i) From the various decisions and the provisions of law it is clear that the receipt by way of interest on short-term deposit is an income assessable under the head "Income from other sources". (ii) That there is no provision under section 57 for claiming the deduction of any interest paid on the borrowed capital for establishment of factory. (iii) The actual cost for the purpose of depreciation includes the interest payable on the money borrowed and this is the gross payment of interest and not the net payment, i.e., after adjustment of any interest received on short-term deposit. (iv) There is no provision under the Act under which the income received on short-term deposit is exempted or is liable to be adjusted against the interest paid on money borrowed for the capital expenditure. (v) The assessee was not carrying on business during the relevant assessment year and, therefore, there was no occasion for determining the income from business. (vi) The income received on short-term deposit on the surplus fund lying is "income from other sources" and not from "business". (vii) There is no nexus between the r....