Interest on FDRs before business Commencement is Income from Other Sources

Principal CIT Vs. M/S Sangam Power Generation Company Limited (Allahabad High Court);

Issue raised in this appeal is squarely covered by three judges judgment of Supreme Court in Tuticorin Alkali Chemical and Fertilizers Ltd. Vs. ITC, 1997 (6) SCC 117. Therein company was incorporated on 03.12.1971 and commenced business on 31.06.1982. It has taken term loan from various banks and financial institutions but substantial amount of borrowed funds, which was not immediately required by Company was kept invested in short­ term deposits with For the A.Y 1982­- 83 (financial year 1981- 82), Assessee received a total amount of interest of Rs. 2,92,440 and disclosed the said amount as “income from other sources”. Company then disclosed a business loss of Rs. 3,21,802 and after setting off interest income against business loss, it claimed benefit of carry forward of net loss of Rs. 29,360/-­. Subsequently revised return was filed by company, claiming a business loss of Rs. 3,21,802/­and with respect to interest income, it claimed that it will go to reduce pre­ production expenses, therefore, interest income was not exigible to tax. A.O rejected this claim and CIT (A) confirmed the view of A.O. Tribunal also rejected appeal of company. Supreme Court also confirmed the aforesaid view. It confirmed Madras High Court’s decision in Commissioner of Income Tax Vs. Seshasayee Paper and Boards Ltd 1985 (156) ITR 542, that interest earned by Assessee on investment of share capital in call deposits, even before production commenced, would be assessed separately under the heads ‘Other sources’. Contrary view taken by Andhra Pradesh High Court in Commissioner of Income Tax Vs. Nagarjun Steels Ltd 1988 Tax LR 973 (AP), by Orrisa High Court in Commissioner of Income Tax Vs. Electrochem Orrisa Ltd 1995 Tax LR 911 (Orrisa) and Bombay High Court in Commissioner of Income Tax Vs. Maharashtra electrosmelt Ltd 1995 Tax LR 1002 (Bombay) was overruled. Court also referred to a decision of this Court in Kedar Narain Singh Vs. Commissioner of Income Tax 1938 6 ITR 157 (ALL) holding “anything which can properly be described as income is taxable under the Act unless expressly exempted”. Following the above principle, Court held that interest earned by Assessee is clearly its income and unless it can be shown that any provision like Section 10 has exempted it from tax, it will be taxable. The fact that source of income was borrowed money does not detract anything from Revenue character of receipt.

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