2000-(158)-CTR -0455 -KER


IT Ref. No. 23 of 1997, decided on September 22, 1999.




Pursuant to the direction given by this Court in an application under section 256 (2) of the IT Act, 1961 (in short ‘the Act’), the Income-tax Appellate Tribunal, Cochin Bench, (in short ‘the Tribunal’) has referred the following question for opinion of this Court :

“Whether, on the facts and in the circumstances of the case, interest on the borrowal made by the assessee against the fixed deposit made by the assessee with the bank is an allowable deduction under section 57 (iii) of the IT Act.

2. The factual position as indicated in the statement of case is as follows : Assessee is a public limited company engaged in plantation business. In addition to its income from plantation business, it has income from interest on fixed deposits with a bank, which were assessable under the head ‘other sources’. Against this interest income, the assessee claimed a sum of Rs. 1,40,647 as deduction towards interest paid by it on loans taken from the bank. The AO disallowed the claim on the ground that interest payable relates to loans taken for business purposes, which is purely agricultural income in nature and hence no deduction could be given under section 57 of the Act. The assessee went in appeal before the Commissioner of Income-tax (Appeals) [in short “CIT(A)”], who allowed the assessee’s claim and directed the AO to allow it, following his earlier order in the case of the assessee for the previous year. Aggrieved by the order of the first appellate authority, Revenue filed second appeal before the Tribunal. It was argued that interest payable on the loans taken by the assessee for agricultural purposes is in noway a charge on the interest earned on fixed deposits. The Tribunal did not accept this contention and dismissed the appeal relying on its own decision for earlier period. An application under section 256 (1) was filed for referring the question, as quoted above. The same was rejected and, therefore, an application under section 256 (2) of the Act was filed, and direction was given for referring the question.

3. Learned counsel for the Revenue submitted that income-tax is attracted at the point when the income is earned. Taxability of income is not dependent upon its destination or the manner of its utilisation. Learned counsel for the assessee with reference to section 57 (iii) submits that the Tribunal was justified in its view, more particularly when it was following its earlier view, against which the Revenue had not carried any reference.

4. In order to appreciate rival submissions it is necessary to quote section 57 (iii), which reads as follows:

“Sec. 57 : Deduction section – The income chargeable under the head “Income from other sources” shall be computed after making the following deductions, namely :

(i) xxxxx xxxxx xxxxx

(ia) xxxxx xxxxx xxxxx

(ii) xxxxx xxxxx xxxxx

(iia) xxxxx xxxxx xxxxx

(iii) any other expenditure (not being in the nature of capital expenditure) laid out or expended wholly and exclusively for the purpose of making or earning such income.”

“Interest” means : [in terms of section 2(28A)] .

“interest payable in any manner in respect of any moneys borrowed or debt incurred (including a deposit, claim or other similar right or obligation) and includes any service fee or other charge in respect of the moneys borrowed or debt incurred or in respect of any credit facility which has not been utilised.”

5. Income-tax is attracted at the point when the income is earned. Taxability of income is not dependent upon its destination or the manner of its utilisation. It has to be seen whether at the point of accrual, the amount is of a revenue nature. If so, the amount will have to be taxed. The question whether a particular receipt is of the nature of income and falls within the charge of section4 of the IT Act, 1961, is a question of law which has to be decided by the Court on the basis of the provisions of the Act and the interpretation of the term ‘income’ given in a large number of decisions of the High Courts, the Privy Council and the Supreme Court.

6. Interest income is always of a revenue nature, unless it is received by way of damages or compensation. If a person borrows money for business purposes but utilises that money to earn interest, however temporarily, the interest so generated will be his income. This income can be utilised by the assessee whichever way he likes. He may or may not discharge his liability to pay interest with this income, Merely because it was utilised to repay the interest on the loan taken by the assessee, it did not cease to be his income. When the question is whether a receipt of money is taxable or not or whether certain deductions from that receipt are permissible in law or not, the question has to be decided according to the principles of law, and not in accordance with accountancy practice. Accounting practice cannot override section 56 of any other provision of the IT Act.

7. Under the IT Act, 1961, the total income of a company is chargeable to tax under section 4. The total income has to be computed in accordance with the provisions of the Act. Section 14 lays down that for the purpose of computation, income of an assessee has to be classified under six heads. It is possible for a company to have six different sources of income; each one of which will be chargeable to income-tax. ‘Profits and gains of business or profession’ is only one of the heads under which a company’s income is liable to be assessed to tax. If a company has not commenced business, there cannot be any question of assessment of its profits and gains of business. That does not mean that until and unless the company commences its business, its income from any other source will not be taxed. The company may keep the surplus funds in short-term deposits in order to earn interest. Such interests will be chargeable under section 56. In other words, if the capital of a company is fruitfully utilised, instead of being kept idle, the income thus generated will be of a revenue nature and not an accretion to capital. Whether the company raised the capital by issue of shares or debentures or by borrowing, will not make any difference to this principle. If borrowed capital is used for the purpose of earning income, that income will have to be taxed in accordance with law. Income is something which flows from the property. Something received in place of the property will be a capital receipt. The amount of interest received by the company flows from its investments and is its income and is clearly taxable even though the interest amount is earned by utilising 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 utilising 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.

8. The position has been succinctly stated by the apex Court in Tuticorin Alkali Chemicals & Fertilizers Ltd. vs. CIT (1997) 141 CTR (SC) 387: (1997) 227 ITR 172 (SC) : TC S41.3602. The question is accordingly answered in the negative in favour of the Revenue and against the assessee.

The reference is accordingly disposed of.

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