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2006 DIGILAW 558 (GUJ)

GODRAJ SOAPS LTD. v. COMMISSIONER OF INCOME TAX

2006-08-30

M.R.SHAH, R.S.GARG

body2006
M. R. SHAH, J. ( 1 ) THE Income Tax Appellate Tribunal, Ahmedabad Bench b has referred the following questions to this Court at the instance of assessee as well as the revenue for our consideration arising out of the ITA No. 3820/ahd/93 in relation to assessment year 1990-91, for its opinion. Question referred at the instance of assessee. 1. Whether on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the receipts by way of interests and short term capital gains were taxable as income?2. Whether on the facts and in the circumstances of the case, the Tribunal was right in law in holding that interest and short term capital gains, arising out of investments made from share capital raised, were required to be taxed as income from other sources? question referred at the instance of revenue. Whether, on the facts and in the circumstances of the case, the Tribunal is right in law in holding that the income earned during the preproduction period arising from investment made out of borrowed funds and debentures should be adjusted against the financial charges and expenses incurred by the assessee in plant and machinery in the current year? ( 2 ) FACTS in nut shell for disposal of the present Reference are that the assessee company is a public limited company and assessment year under consideration was 1990-91 ending on 31-1-1990. The business of the assessee company was being set up and the plants and machineries were under installation for the manufacturing of Alpha Glafin Sulphanate fractionated and hydrogenerated fatty Acid and also fractionated Eatty Alcohol for the manufacture of vegetable oils and its by-products during the assessment year under consideration. During the assessment proceedings, the Assessing Officer observed from the perusal of Schedule - 4 as under: incidental expenditure during the construction period ending capitalization" that the company had received the following income:- A) Interest on deposits. Rs . 15,52,309/- B) Net income on the short term investment. Rs . 9,18,500/- . Rs . 24,70,809/- It was submitted by the assessee company that assessee company received short term capital gains of Rs. 9,18,500/- out of purchase and sales of units and further received interest Income of Rs. 15,52,309/- out of deposits. Rs . 15,52,309/- B) Net income on the short term investment. Rs . 9,18,500/- . Rs . 24,70,809/- It was submitted by the assessee company that assessee company received short term capital gains of Rs. 9,18,500/- out of purchase and sales of units and further received interest Income of Rs. 15,52,309/- out of deposits. The Assessing Officer was of the opinion that the above income of interest and short term capital gains is to be treated as income from other sources and he called upon the assessee as to why it should not be treated as such. It was the contention on behalf of the assessee that in the year under consideration, financial charge of Rs. 57,48,093/- were shown in the schedule 4 of the Balance sheet and out of that, the amount of Rs. 24,70,809/- the interest income and that of short term capital gains should be adjusted. The Assessing Officer was of the opinion that the amount of interest income and short term capital gains referred to above, were taxable in the hands of the assessee company as income from other sources. ( 3 ) BEING aggrieved by and dissatisfied with the order passed by the Assessing Officer, the assessee preferred the appeal before the CIT (Appeals) contending that the assessee company had collected Rs. 30. 89 crores towards debentures, Rs. 20 crores from IDBI towards Bridge loan and Rs. 32. 47 crores from paid up equity capital by end of assessment year 31-3-1990 and the said funds were raised to set up the plants at Valia. It was further contended that the amount of Rs. 57,49,093/- was incurred towards financial charges in raising the above funds and the amount received by assessee company on account of interest and short term capital gains was to be set off against these financial charges. It was further contended that total expenditure incurred in the project in the end of the assessment year under consideration was Rs. 9,15,46,252/- out of which Rs. 24,70,809/- earned by assessee by way of interest and income on investment had to be reduced and rest was to be capitalized and it will result to lesser depreciation to assessee company in future assessment year. The CIT (Appeals) did not accept the said contentions and dismissed the appeal. 9,15,46,252/- out of which Rs. 24,70,809/- earned by assessee by way of interest and income on investment had to be reduced and rest was to be capitalized and it will result to lesser depreciation to assessee company in future assessment year. The CIT (Appeals) did not accept the said contentions and dismissed the appeal. Being aggrieved by and dissatisfied with the order passed by the CIT (Appeals), the assessee went in appeal before the Income Tax Appellate Tribunal. The short question was before the Income Tax Appellate Tribunal was, whether the amount of interest income of Rs. 15,52,309/- and short term capital gains of Rs. 9,18,500, were to be treated capital receipts and accordingly to be reduced from the financial charges which were capitalized or whether the receipt of Rs. 24,70,809/- (interest income of Rs. 15,50,309/- plus short term capital gains of Rs. 9,18,500/-) was to be treated as income from other sources. The learned Income Tax Appellant Tribunal held against the assessee that the the amount of interest by the assessee on deposits of utilized amount of share capital or amount of short term gains, arose on investment of share capital shall be treated as income taxable under the head "income from other sources". However, the Tribunal held that the amount of interest on deposits or short term capital gains, arose on investment of borrowed funds, shall be subject to be set off out of financial charges or expenses allegedly incurred by the assessee on installation of plant and machinery in the year under consideration. ( 4 ) MS Mauna Bhatt, learned Counsel appearing on behalf of the revenue submitted that the question which has been paused for our consideration is now covered by the decision of the Hon ble Supreme Court in the case of Tuticorin Alkali Chemicals and Fertilizers Ltd v. Commissioner of Income Tax reported in 1997 (227) ITR 172. The question before the Hon ble Supreme Court for consideration was whether the interest derived by the assessee from the borrowed funds, which were invested in short term deposits with banks could be chargeable to tax under the head "income from other sources" or would go to reduce the interest payable by the term loans secured by the assessee from financial institutions, which would be capitalized after the commencement of commercial production? It also appears that in fact the said question was referred by the Tribunal to the Hon ble Supreme Court in view of two conflicting decisions between Madras High Court in the case of CIT v. Seshasayee Paper and Boards Ltd. Reported in (1985) 156 ITR 542 and the decision of the Andhra Pradesh High Court in the case of CIT v. Nagarjuna Steels Ltd. (1988) 171 ITR 663. The Hon ble Supreme Court in the said judgment held that the interest earned by the assessee on investment of the share capital in call deposits even before production, can be arisen separately under the head "income from other sources". The Hon ble Supreme Court also further held as under: that the company had surplus funds in its hands. In order to earn income out of the surplus funds, it had invested the amount for the purpose of earning interest. The interest thus earned was clearly of revenue nature and would have to be taxed accordingly. The accountants might have taken some other view but accountancy practice was not necessarily good law. This was not a case of diversion of income by overriding title. The assessee was entirely at liberty to deal with the interest amount as it liked. The application of the income for payment of interest would not affect its taxability in any way. The company could not claim any relief under Section 70 or Section 71 since its business had not started and there could not be any computation of business income or loss incurred by the assessee in the relevant accounting years. In such a situation, the expenditure incurred by the assessee for the purpose of setting up its business could not be allowed as deduction, nor could it be adjusted against any other income under any other head. Similarly, any income from a non business source could not be set off against the liability to pay interest on funds borrowed for the purpose of purchase of plant and machinery even before commencement of the business of the assessee. ( 5 ) SHRI BD Karia, learned advocate appearing on behalf of the assessee is not in a position to dispute that the dispute is not covered by the decision of the Hon ble Supreme Court in the case of Tuticorin Alkali Chemicals and Fertilizers Ltd (supra ). ( 5 ) SHRI BD Karia, learned advocate appearing on behalf of the assessee is not in a position to dispute that the dispute is not covered by the decision of the Hon ble Supreme Court in the case of Tuticorin Alkali Chemicals and Fertilizers Ltd (supra ). In view of the judgment and the Hon ble Supreme Court in the case of Tuticorin Alkali Chemicals and Fertilizers Ltd (supra), it cannot be said that the Tribunal has committed any error in holding that receipts by way of interest and short term capital gains were taxable as income and that were required to be taxed as Income from other Sources. The reference is accordingly answered in favour of the revenue and against the assessee. Similarly, considering the aforesaid judgment of the Hon ble Supreme Court, the Tribunal has committed an error in holding that the income earned during the pre-production period, arising from investment made out of borrowed funds and debentures, should be adjusted against the financial charges and expenditure incurred by the assessee in plant and machinery in the current year. Accordingly the order passed by the Income Tax Appellate Tribunal dated 11-9-1995 passed in ITA No. 3820/ahd/93 to that extent is required to be quashed and set aside and is accordingly quashed and set aside. The question referred to us at the instance of revenue is accordingly answered in favour of revenue and against the assessee accordingly. This Reference is accordingly disposed of. No costs.