COMMISSIONER OF INCOME TAX v. MODI RUBBER LIMITED — 1994 DIGILAW 211 (DEL)

D. P. WADHWA, J. ( 1 ) AT the instance of the revenue, the income tax Appellate Tribunal ( the Tribunal for short) referred to this Court the following question, stated to bs question of law, for its opinion : I "whether on the facts and in the circumstances of the case. the ITAT was correct m law in holding that the interest income on investment of *he share capital derived by ibe assessee could not be brougjit to tax in the hands of he assessee company because it has not started its business ?" M/s Modi Rubber Ltd. , Modinagar ( 2 ) STATEMENT of case drawn up by the Tribunal is brief and we may reproduce the same : - "the assessee is a limited company. Its relevant accounting year ended on 30-4-73. The company was still in tbg process of being commissioned and had not commenced production. "the assessee company had collected funds by way of share capital which were deposited in the banks on which interest of Rs. 3,21,679 was earned. The assessee claimed before the I TO that the said interest income was not assessable and that out of expenditure of Rs. 21. 61 lakhs, expenditure of Rs. 4 lakhs should be set off against the said interest income and loss of Rs. 83,200. 00 should be computed as per assessee s revised return. ITO, however. held that the said expenditure could net be allowed as a deduction and he determined the interest income at Rs. 3,24. 896 against which he allowed deduction of Rs. 8,0961- on account of interest paid and computed the net income at Rs. 3,16,800. 00. ( 3 ) CIT (A) accepted the assessee s claim substantially and computed the assessee s income at Nil. CIT (A) relied on ITAT Patna Bench decision in Bihar Alloy and Steel Ltd. where the surplus funds available were deposited in short term deposits and it was held tha" the said interest receipts would go to decrease the cost of the assets, following the principles of accountancy for determining the actual cost of the assets. ( 4 ) BEFORE the Tribunal, the revenue relied on Addl. CIT Vs. Indian Druga Pharmaceutical Ltd. (1982) 9 Taxman 95 (Delhi ). The assessee relied on ITAT, Madras Bench "b" (Special Bench) decision dated 16-1-1982 in. Arason. Aluminium Indus ries (P) Ltd. (1982) 1-ITD-10. ( 4 ) BEFORE the Tribunal, the revenue relied on Addl. CIT Vs. Indian Druga Pharmaceutical Ltd. (1982) 9 Taxman 95 (Delhi ). The assessee relied on ITAT, Madras Bench "b" (Special Bench) decision dated 16-1-1982 in. Arason. Aluminium Indus ries (P) Ltd. (1982) 1-ITD-10. The Tribunal followed the special Bench decision after noting different High Court decisions. " 3. If we refer to the order of the Tribunal passed in appeal by the- revenue against the order of the Commissioner of Income-tax (Appeals), the Tribunal said that the assessee s case was covered by the decision of the ITAT Special Bench in Arasan Aluminium Industries (P) Ltd. v. First ITO, [1982] 1 ITD 110 (Madras) (1 ). In that case the company was engaged in the process of erection of its plant and machinery and construction of factory and had received interest income on investment of its funds and had also incurred excenditure on -payment of interest on loans taken by the company. ( 5 ) THE net interest receipts were claimed as not taxable on the ground that the said receipts would go to reduce the pre-operational expenses. The Tribunal accepted the- assessee s claim observing that the assessee s claim was nothing more than the application of the prinpicles laid down by the Supreme Court in Challapalli Sugars Ltd. v. C. I. T. , [1975] 98 ITR 167 (2 ). The Tribunal said that just as any expenditure on interest during construction period went to increase the project cost, any interest earned would go to reduce the capital cost especially when the income had been earned not through long terms lendings and investments but in the course of entrustment for safe custody of funds to a bank while awaiting use in the capital project. This decision of the ITAT (Special Bench) in Arasan Aluminium Industries case has not been followed in various decisions of the High Courts in similar circumstances. This decision of the ITAT (Special Bench) in Arasan Aluminium Industries case has not been followed in various decisions of the High Courts in similar circumstances. The assesses had urged before the Tribunal that what was held in fixed deposits were not long term investments but in the course of entrustment for safe custody of funds to the banks while the said moneys were awaiting use in the capital project, and further that there was no income earning activity during the period when the assessee was setting up its factory, and, therefore, as per accounting practice the net result of the said period should be seen and the revenue was not justified in picking up only one activity and assessing income from the investment of surplus funds. The Tribunal accepted the contention of the assessee. Three decisions of the High Courts in Madhya Pradesh State Industries Corporation Ltd. v. Commissioner of Income-tax, M. P. , [1968] 69 ITR 824 (MP) (3), Commissioner of Income-tax, Bombay City-11 v. United Wire Ropes Ltd. , [1980] 121 I. T. R. 762. (Bombay) (4); and Additions Commissioner of Income-tax, Madras-1 v. Madras Fertilisers Ltd. , [1980] 122 I. T. R. 139 (Madras) (5), were not considered relevant by the Tribunal as it was stated that these cases were either before, or did not take notice of, the Supreme Court decision in Challapall; Sugars Ltd s case [1975] 98 ITR 167. (Bombay) (4); and Additions Commissioner of Income-tax, Madras-1 v. Madras Fertilisers Ltd. , [1980] 122 I. T. R. 139 (Madras) (5), were not considered relevant by the Tribunal as it was stated that these cases were either before, or did not take notice of, the Supreme Court decision in Challapall; Sugars Ltd s case [1975] 98 ITR 167. The Tribunal also look notice of the decision of the Delhi High Court in Additional Commissioner of Income-tax, New Delhi v. Indian Drugs and Pharmaceuticals Ltd. [1083] 141 ITR 134= [1982] 9 Taxman 95 (6), where the High Court had observed that "if, for example, the surplus moneys of the company are invested to earn interest, the interest income would certainly be assessable under the head "income from other sources", but said that it was merely an obiter dicta and the ratio of the said decision was that the receipts and payments before the business had been fully set up, would be clearly of capital account and if the receipts and payments pertain to fixed structure of the company s business which was being set up, it would be inconsistent to hold that the expenditure incurred by the assessee prior to the setting up would be of a capital nature, but the receipts would be of revenue nature M/s Modi Rubber Ltd. , Modinagar ( 6 ) WE may note the various decisions of the High Courts and the Supreme Court referred to above, and some more, on the question on which we have to give answer. ( 7 ) IN Challapalli Sugars Ltd. v. Commissioner of Incoms-tax, A. P. , [1975] 98 ITR 167, the question before the Supreme Court was whether the interest payment of Rs. 2,38,614. 00 represented an element of the actual cost of the machinery, plant, etc. , to the assessee and as such depreciation and development rebate were admissible with reference to that amount also. In this case the assessce company had borrowed considerable sums of money from Industrial Finance Corporation of India for the installation of machinery and plant, and during the relevant period and for the period prior to the commencement of its business, the assessee paid Rs. 2,38,614. 00 as interest. In this case the assessce company had borrowed considerable sums of money from Industrial Finance Corporation of India for the installation of machinery and plant, and during the relevant period and for the period prior to the commencement of its business, the assessee paid Rs. 2,38,614. 00 as interest. The case of the assessee was that the payment of interest added to the cost of machinery and plant to the assessee and as such While calculating depreciation admissible to the asscssee, the interest paid should be treated as pan of the cost of the machinery and plant to the assessee. The court observed that "the accepted accountancy rule for determining the cost of fixed assets is to include all expenditure necessary to bring such assets into existence and to put them in working condition. In case money is borrowed by a newly started company which is in. the process of constructing and erecting its plant, the interest incurred before the commencement of production on such borrowed money can be capitalised and added to the cost of the fixed, assets which have been created as a result of such expenditure. The. above rule of accountancy should, in our view, be adopted for determining the actual cost of the assets in the absence of any statutory definition or order indication to the contrary. " The court also referred to section 208 of the Companies Act, 1956, which made provision for payment of interest on share capital In certain contingencies.-The court, therefore, held that if interest was paid on money not raised by way of share capital but taken on loan for the purpose of defraying the expenses of construction of any work or building or the provision of any plant, the sum so paid by way of interest hight becharged to capital as part of the cost of construction of the work or building or the provision of the plant. ( 8 ) IN Madhya Pradesh State Industries Corporation Ltd. v. Commissioner of Income-tax, M. P. , [1968] 69 ITR 824 (M. P. the. question was if the sum received by way of interest. by the assessee should be taxed under section 28 as business income or under section 56 as-income from. other sources . . The assessee, a Government company, was incorporated for taking over and- running certain concerns of the State Government. question was if the sum received by way of interest. by the assessee should be taxed under section 28 as business income or under section 56 as-income from. other sources . . The assessee, a Government company, was incorporated for taking over and- running certain concerns of the State Government. For the assessment year in question, the assessee did not carry on any business nor was there any production. The share moneys received by the company not being immediately required, were deposited in call-deposits in certain banks. . The court held that the deposit of share capital in a bank could not be said to be an act of mony-lending and, hence, the interest income was properly assessable as -income from other source.- under section 56 of the Act. ( 9 ) IN Traco Cable Company Ltd. v. Commissioner of Incomc- tax [1969] 72 ITR 503 (Kerala) (7), the assessee, a public limited company, was engaged in the business of manufacture of wires, cables, etc. Though the company obtained certificate of commencement of business on July 30, 1961, the directors report for the year ended March 31, 1962, said that the company would. go into operation before the end of 1963. The company had deposited in banks the share capital collected and for the year ended - March 31, 1962. it earned a sum. of over Rs. 68,000. 00 as. interest. During this period the company also incurred an. expenditure of over Rs. 34,000. 00 by way of salary and wages to its employees, printing stationery. etc. Clause (v) of object 3 of the memorandum of association of the company was "to invest and deal with the funds of the company not immediately required upon such securities and in such manner as may from time to lime be determoned. " The assessee company claimed that the. deposit of the share capital made by it in banks was a business carried on by the company as per its memorandam of association, and that interest thereby earned was income from business and as such the expenditure was as allowable deduction. This claim was rejected. The Tribunal held that the amounts received as interest were income from other sources and that, the expenditure-incurred was not an allowable deduction even under setion 57 of the Act. This claim was rejected. The Tribunal held that the amounts received as interest were income from other sources and that, the expenditure-incurred was not an allowable deduction even under setion 57 of the Act. The court approved the decision of the Tribunal and said that the clause of the memorandum of association which was relied on by the assesses only empowered the company to invest and deal with the funds of the company not immediately required, and that all that the company did was to deposit in banks the share capital received instead of keeping it in its own sate. This, the court said, was done because the company had not commenced business and the amounts were not immediately required for any business, and that the receipt of income by interest was only incidental or consequential on the deposit. The court also held that the deposit of. share capital by the company was not a business carried en by the company, and further that the expenditure incurred was not incurred for the purpose of making or earning interest received by the company on deposit of the share capital, and thus, the office and establishment expenses unconnected with the earning of the company or keeping the company alive were not permissible deductions under section 57 of the Act. ( 10 ) STRONG reliance was placed by the assessee on a decision of this Court in Additional Commissioner of Income-tax New Delhi v. Indian Drugs and Pharmaceuticals Ltd. 119831 141 ITR 134 (8 ). The revenue also relied on this judgement. on. account of certain observations made by the Bench to which we will presently refer to. In this case the assessee company was promoted to atart the manufacture of drugs and pharmaceuticals and was in the process of melting up its factory building. Daring the relevant year. the factory building was under construction and the plant and machinery was in the process of installation. The business had not been set up and none of the units had commenced production. The assessee s gross receipts from sale of tender documents etc. regarding construction and erection of plant and machinery to contractors amounted to Rs. 50,450. 00,, and after dedecuction of estimated expenditure the net receipts came to R. s. 40,540. The assessee also realised amounts of Rs. 28,241. 00 by way of sale proceeds of trees, grass, etc. , and Rs. 17,818. regarding construction and erection of plant and machinery to contractors amounted to Rs. 50,450. 00,, and after dedecuction of estimated expenditure the net receipts came to R. s. 40,540. The assessee also realised amounts of Rs. 28,241. 00 by way of sale proceeds of trees, grass, etc. , and Rs. 17,818. 00 by way of sale proceeds of stones and boulders. This was consequential to the parcel c. f land being cleaned for the purpose of construction of the factory. The assessee realised yet another amount of Rs. 7,520. 00 on the supply of water and electricity at the site. The revenue contended that alt these amounts represented income from other sources. The Tribunal held that these receipts were directly related, to the capital structure of the business which was being set up. and that did not by themselves set up an independent source of income unrelated to the business which was being set up. The. Tribunal held that it. was from this point of view that these receipts were distinguishable from interest on deposite of surplus money, and that interest was realised by utilisation of surplus money and the utilisation created a separate independent source. The Tribunal was. therefore, of the opinion that the impugned receipts did not create any independent source and were in fact inextricably linked with the process of setting up the business by special reference to the clearance of the land and erection of building and equipment. In coming to this conclusion the Tribunal, relied on a decision of the Supreme Court in Nalinikant Ambalal Mody v. S. A. L. Narayan Row, [1966) 61 ITR 428. (9), where the court had pointed out whether an income falls, under one head or another had to be decided according to the common notions of practical men. and the question under which head an income came could not depend on when it was received. On a reference tor this Court by the revenue, the court ageed with the reasoning given by the Tribunal and holding that receipts were clearly referable to the source of businesss. profession or vocation and since it was not fully set up at the time they were received, the receipts were of a capital nature. The court also referred to the decision of the Supreme Court in Challapalli Sugars Ltd. v. CIT. [1975] 98 ITR 167. profession or vocation and since it was not fully set up at the time they were received, the receipts were of a capital nature. The court also referred to the decision of the Supreme Court in Challapalli Sugars Ltd. v. CIT. [1975] 98 ITR 167. and--held that the receipts were directly related to the capital structure of the business and they could not be considered as a-n independent source of income unrelated to the business which was being set up. Court dering the argument of the revenue based on a decision of the Calcutta High Court in Commissioner of Income Tax v. Ajmera Industries P. Ltd. 11976] 103 ITR 245 (10), the court held that in that case the question was whether the income derived by way of rent from a certain building was assessable as income from business or as income from house property, and that was not the question here. The court said that it was not as if every item of receipt, prior to the setting up of a business, would be only capital in nature. Elaborating, the court gaid that if the surplus monies of the company were invested to earn interest or if, as in the Ajmera Industries case, the building constructed was sot used by the company but let out to earn rental income, the interest or the rental income would certainly be assessable under the head "income from other sources". On these observations, the revenue relics insupport of the present case before us. This court in held that the receipts in that case were from sources which were not independent but. which were inextricably linked with the process of the setting up of-the business. ,. ( 11 ) IN Commissioner of Income-tax v. Seshasayee Paper and Boards Ltd. , [1985] 156 ITR 542 (Madras) (11), the assessee, a public limited compapy, invested its paid up share capital and loans obtained from the ICICI and Export and Import Bank, Washington,. in banks on call deposits and received interest during the relevant year. The assessee adjusted the interest payable on its loans against. the. interest received. The assessee had not established its factory during the year in question and there was, therefore, no question of , computing its business income during that year. . in banks on call deposits and received interest during the relevant year. The assessee adjusted the interest payable on its loans against. the. interest received. The assessee had not established its factory during the year in question and there was, therefore, no question of , computing its business income during that year. . The Tribunal had held that it was justifiable for the assessee to claim set-off the entire interest as attributable to the purchase cost getting reduced. The court held that the Tribunal was not right in holding that the interest receipts could not be assessed and the difference between the interest paid and the interest received should be capitalised. The court said that the interest earned by the assessee on investment of share capital in call deposits could be assessed separately under the head "other sources". ( 12 ) IN Commissioner of Income-tax v. Cap Steel Ltd. , [1986]. 162 ITR 533 (Karnataka) (12), the question before the court was whether the Tribunal was right in law in. holding that the net interest income should be capitalised in each year. The assessee, a public limited company, had borrowed funds from financial institutions for the purpose of pstallation of plant and machinery and also for construction of bulldings. It deposited the excess money available with it in term deposits and earned interest income out of those deposits. The assessee had contended that the interest income so received should not be brought to tax and that it should be given set off against the interest payable on that part of the borrowings,. and. that the net interest should, be capitalised. The Tribunal accepted the contention. The court said that before it there was no dispute and indeed there could not. be any dispute as to the capitalisation of interest on the borrowals, and that the dispute, however, was only "whether it should be net interest or gross interest ?" The court held that only the gross interest should be capitalised and not the net interest. It answered the reference in favour of the revenue. ( 13 ) IN Commissioner of Income Tax. It answered the reference in favour of the revenue. ( 13 ) IN Commissioner of Income Tax. v. Bokaro Steel Limited, (1988) 170 I. T. R,-522 (Patna) (13) (assessment years 1965-66 to 1971-72), and Bokato Steel Ltd. v. Commissioner of Inoome-tex, (1988) 170 I. T. R. 545 (Patna) (14) (assessment year 1972-73), the assessee, a Government company, was constructing an integral iron and steel works during the relevant assessment years. "the assesses had certain receipts which it grouped under the heading "miscellaneous income" in the various years. These the assessee had set off against the expnses of the year and the balance expenses were then capitalised. These miscellaneous income were the receipt from properties let out to outsiders (contractors employees) ; hire charges received from contractors for use of plant and equipment let out to them; interest on advances to the contractor; interest on short-term deposits; miscellaneous income; royalty; land-rent and liquidated damages received from the contractors. The assessee contended that these receipts were not taxable as these were incidental to the assessee s business of construction and that these had gone merely to reduce the cost of construction. The assessee also contended that business of the assessee company had already commenced with its incorporation under the Companies Act. The Tribunal held that the receipt from letting out properties to outsiders were chargeable under Section 22 of the Act, but the other receipts were incidental to the business of the assessee and were not assessable. The Patna High Court on reference, however, reversed the Tribunal even on : this point holding that the occupation of the company s quarters by the employees of the contractor was incidental and subservient to , the business of the assessee, and all the receipts were incidental to the overall construction work during the pre-business period,, and that none of the receipts were assessable to tax. In 170 I. T. R. 545 which pertained to the assessment year 1972-73 the assessee, before the construction of its plant was complete, had received various amounts and one of such amounts was interest on short-term deposits with the banks on amount received from the Government. The Tribunal had found that surplus money not required for business had been kept in short-term deposits in the banks. The Tribunal had found that surplus money not required for business had been kept in short-term deposits in the banks. The court held that the bank deposits were "not incidental to the business of the assessee nor were they incidental to the construction of the factory of the assessee, that the interest on short-term deposits constituted income of the assessee and it was assessable under Section 56 of the Act as income from other sources. ( 14 ) IN Commissioner of Income-tax v. Andhra Farm Chemicals Corporation, (1988) 171 I. T. R. 660 (15), the assissee was a subsidiary company of Andhra Sugars Limited. The assessee company was set up for the purpose of manufacturing chemicals. Dining its formative period certain money was lying with it and with a view not to keep that money idle it deposited the same with the holding company. Meanwhile, the assesses company required some money which it borrowed from the holding company. It paid interest on this borrowed money and this was sought to be set off against the interest earned on the deposits made by the assessee company with the holding company. The Tribunal held that though for the purpose of accounting there appeared to be two independent transactions one by way of deposit by the assesses and another by way of loan taken by the assessee in truth and in reality there was only one transaction:. The Tribunal also held that it was not a case of dedution nor was it a case of allowing an expenditure incurred, but that the question was what was the real and true interest income derived by the assessee ? The court on reference said that the Tribunal s finding was that these we re not two indepndent transactions bat only one transaction. The court, therefore, reframed the question as under "whether, on the facts and in the circumstances of the case, the Appellate Tribunal was justified in holding that though for the purpose of accountancy, there appeared to be two independeat transactions in truth and in reality there was only one transaction?"the court did not hold that the finding of the Tribunal that there was only one transaction was not justified or warranted. In this view of the matter the court held that no question of law arose in the matter ( 15 ) IN Commissioner of Income-tax v. Derco Cooling Coils Ltd. . . In this view of the matter the court held that no question of law arose in the matter ( 15 ) IN Commissioner of Income-tax v. Derco Cooling Coils Ltd. . . (1952) 198 ITR 375 (Andhra Pradesh) (16) the question before the court was whether, on the facts and in the circumstances of the case. the amount of Rs. 18,913. 00 being interest received by the assessee company from bank deposits could not be brought to tax. The assessee-company had not yet gone into production and for the purpose of construction and setting up of an industry it borrowed funds and paid interest thereon. At the same time the assessee company carned interest on the share capital monies received from the public which, was kept in fixed deposit with the banks. In the original return the assessed company showed the interest received, but subsequently claimed that this amount shall not be treated as income as it was liable to be deducted from the interest paid on term loans and the net interest arrived at was to be capitalised. Thus, the contention was that the interest received during the pre-production or construction period shall be refleeted in the capital cost of the project and it should go to reducing the capital cost. The court held that the interest received by the assessed company from bank deposit could be brought to fax as income from other sources. The court observed that the amount of expenditure out of which the interest received was sought to be deducted related to term loans used from construction and setting up of the plant. The receipt in question arises out of share capital money deposited with the bank which might or might not be utilised for the purpose of setting up of the plant. The very idea of set-off connotes that there is a nexus or correlation between the item of receipt and the expenditure. It is not permssible to set off an item of receipt from out of an item of expenditure unrelated to the former or incurred in a different connection. The very idea of set-off connotes that there is a nexus or correlation between the item of receipt and the expenditure. It is not permssible to set off an item of receipt from out of an item of expenditure unrelated to the former or incurred in a different connection. The court held that viewed from any angle there was no justification to treat the amount of interest received on share capital as something other than income, and that to treat the receipt in question as income would not in any way do violence to the normal or ordinary meaning of the term "income ". The court also relied upon another Bench decision in Andhra Pradesh Carbides Ltd. v. Commissioner of Income Tax. , (1992) 198 J. T. R. 386 (17), date of decision November 19, 1986 ). In this latter case the question was also whether the Tribunal was justified in holding that the interest paid in respect ofborrowing from the Andhra Pradesh Industrial Development Corporation Limited by the assesses could not be allowed to be set off against the interest income earned by the assessee. The court said that there was no connection between the two amounts ; that the amount upon which interest was paid to APIDC Ltd. was raised by way of loan for setting up the plant and the interest income was earned on the contributions made by the shareholders towards the shares allotted to them; that both were distinct items and it was not possible to see any reasonable connection between them; and that neither Section 57 (iii) of the Act nor by applying the test of a prudent person managing his affairs, could it be said that the interest earned on the contributions made. by the share-holders could be set-off against the interest payable by the assessee. ( 16 ) IN Commissioner of Income-tax v. Sponge Iron India Ltd (1993) 201 I. T. R. 770 (A. P. K18), apart from the question as to when business could have been said to. have been commenced, the court was called upon to decide whether the assessee was entitled to the duration of the administrative expenses and exploration and mining expenes from out of its interest income. have been commenced, the court was called upon to decide whether the assessee was entitled to the duration of the administrative expenses and exploration and mining expenes from out of its interest income. The Tribunal came to the conclusion that business was not started and, on that basis, the assessee s claim for determination of land on account of administrative expenses and charges for exploration and mining was not accepted. The Tribunal, however, took the view that the interest earned during the period should go to reduce the capital cost inasmuch as the interest was on short-term deposits pending utilisation of available funds on erection, construction, etc. The allocation of expenses under the head "exploration, general administration and capital items" was found to be prima facie justifable under the relevant principles of accountancy. The Tribunal further held that there was no basis to conclude that that allocation was other than bona fide. The Tribunal directed that the assessee s claim for capitalisation be considered by the Income-tax Officer in the light of the decisions of the Special Bench in Nagarjuna Steels Ltd. v. I. T. O. . (1983) 3 ITD 796 (Hyderabad), and Arasan Aluminium Industries (P) Ltd. v.-First ITO, (1982) I ITD 10 (Madras ). The court held that the business had not commenced and it could not be said that in the course of business the assessee was earning interest on deposits. It was held that the interest income could not be treated as business income. The court, thus. held that the assessee could not be entitled to the deduction of administrative expenses and exploration and mining expenses from out of the interest income. Then the question was whether the assessee could claim to set off interest received on short-term deposits against the unadjusted expenditure for the assessment years in question. The assessee had allocated the expenses as against three items, viz. , exploration, general admimstration and capital. The claim of the assessee was that the short-term capital amount was invested on short-term deposits, pending utilisation of available funds on erection, construction, etc. , and the interest earned on such deposits should go to reduce the capital cost. The assessee had allocated the expenses as against three items, viz. , exploration, general admimstration and capital. The claim of the assessee was that the short-term capital amount was invested on short-term deposits, pending utilisation of available funds on erection, construction, etc. , and the interest earned on such deposits should go to reduce the capital cost. The Tribunal accepted the claim, of the assessee in principle, following the two Special Bench decisions noted above, and it observed that the Income-tax Officer was not justified in dismissing the assessee s claim in general terms and, it could not be said that the entire interest income was to be treated as income from other sources without any deduction. The Tribunal, therefore, directed the Income-tax Officer to give a fresh consideration de novo in accordance with law. The court said that though it approved the. observations made by the Tribunal that the administrative expenses having a nexus with the earning of interest income would qualify for deduction, the direction given by the Tribunal in general terms to. consider the question of ductibility in the light of the Special Bench decision in Arasan Aluminium Industries case (1982) I ITD 10 (Madras), was not correct, having regard to the decision of the Court in Commissioner of Income Tax v. Derco Cooling Coils Ltd. (1992) 198 ITR 375 . The court then went on to observe as under: "in that case (Derco Cooling Coils Ltd.) the Division Bench held that unless there is a nexus or correlation between the item of receipt and expenditure, it is not permissible to set off an item of receipt against an item of expenditure unrelated to the former or incurred in a different connection. The Division Bench held that an item of receipt which is prima facie income cannot be transposed into capital account unless the set off is in respect of a related item of expenditure. Thus, the principle enunciated in the judgment of the Special Bench in Arasan Aluminium Industries case (1982) I ITD 10 (Mad), cannot be applied without the qualifications which were pointed out by the Division Bench of this court in the abovementioned case. Thus, the principle enunciated in the judgment of the Special Bench in Arasan Aluminium Industries case (1982) I ITD 10 (Mad), cannot be applied without the qualifications which were pointed out by the Division Bench of this court in the abovementioned case. Subject to this qualification, We do not see any illegality in the direction given to the Income-tax Officer to consider the claim of the assessee for set off of interest received on short-term deposits against unadjusted expenditure to reduce the capital cost to the extent admissible. " Against this decision of the Andhra Pradesh High Court, the assessee filed a Special Leave Petition in the Supreme Court but, it appears. that the same was dismissed (1993) 204 ITR 11 (St. ). ( 17 ) BEFORE the Income-tax Officer the assessee also relied on the objects as per the memorandum of association of the assessee company. The memorandum of association had main objects and also objects incidental or ancillary to the attainment of main objects. In its submission the assessee relied on one of its subsidiary objects which is as under: "b-19 : To invest any moneys of the company not immediately required for the purposes of its business in such manner as may be thought fit and to lend money to such parties and on such terms, with or without security, as may be thought to be for the interest of the company, and in particular to customers of and persons having dealings with the company or- to companies, firms or person carrying on any business which may be useful or beneficial to this Company. " The Income-tax Officer rejected this claim of the assessee. He was of the view that this clause could not be interpreted to mean that earning of interest income from surplus funds amounted to business activity. He pointed out that the assessee company was neither a money lender, nor a banking institution, nor a finance body, and interest earned on investment or surplus funds did not. amount to carry on of any business. ( 18 ) THUS, we find there are chain of authorities of the High Courts holding the view that share money received by the assessee company, if not immediately required, and placed by the asseesses in fixed deposits receipts with banks to earn interest, would be income under the head "income from other sources". ( 18 ) THUS, we find there are chain of authorities of the High Courts holding the view that share money received by the assessee company, if not immediately required, and placed by the asseesses in fixed deposits receipts with banks to earn interest, would be income under the head "income from other sources". In the present case as well, the assessee was in the: process of setting up its factory and had not come into business and the share capital which was its own money was invested by it in fixed deposits in the banks to earn income. The interest income so earned was not related to the activity of the assessee of construction of its factory as such. The interest was also not earned on borrowed capital by the assessee and could not be charged to capital as part of the cost of construction of the factory The principle laid by the Supreme Court in Challapalli Sugars Ltd. s case. (1975) 98 ITR 167, would not, therefore, be applicable. The decision of this Court in Indian Drugs and Pharmaceuticals Ltd. s case, (1983) 141 IIR 134 (20), on which the assessee placed strong reliance, is also of no help to it. As we have seen above, in that case the land had to be cleared and tender invited for construction of the factory and on that account the court held that this activity was inextricably linked with the process of setting up the business of the assessee. In that case the! observation of the court that surplus money of the company if invested would earn interest, would certainly be assessable under the head "income from other sources", was no doubt obiter dicta, but in our view it is nevertheless a correct statement of law. Share capital is raised by a company for setting up an industrial undertaking or utilising it for any other purpose. It is money of the company. This cannot be so in the case of loan which is raised for a specific purpose. Clause B-19 of subsidiary objects of the company is not applicable as it merely provided for investing of monies not immediately required for the purposes of its business when it had not started its business and process of construction of the factory was still on. Clause B-19 of subsidiary objects of the company is not applicable as it merely provided for investing of monies not immediately required for the purposes of its business when it had not started its business and process of construction of the factory was still on. The activity of the deposit of the surplus funds out of the share capital could not be said to be incidental to , the construction of the factory. Interest income from bank deposits thus accrued arose out of an independent source of income during the period when the business had neither been set up nor had commenced and was assessable as income from other sources. In view of our discussion the answer to the question referred becomes quite self evident. ( 19 ) WE, therefore, answer the question in the negative, in favour of the revenue and against the assessee.