1982-VIL-23-ITAT-

Equivalent Citation: ITD 001, 010,

Income Tax Appellate Tribunal MADRAS

Date: 16.01.1982

ARASAN ALUMINIUM INDUSTRIES PRIVATE LIMITED.

Vs

FIRST INCOME-TAX OFFICER.

BENCH

Member(s)  : G. KRISHNAMURTHY., S. RAJARATNAM.

JUDGMENT

Per Shri S. Rajaratnam, Accountant Member --- This is an appeal filed by Arasan Aluminium Industries (P.) Ltd. against the order of the AAC, upholding an assessment on an income of Rs. 25,530 as income from other sources for the assessment year 1978-79.

2. The assessee is a private limited company incorporated on 28-5-1977 with the object of doing business in manufacture and sale of pyrotechnic aluminium powder. Its paid-up capital was Rs. 6.05 lakhs. The accounts were closed for the first time as on 31-10-1978. It is common ground that during the entire year the company was engaged in the process of erection of its plants and machinery and construction of the factory. The assessee received an amount of Rs. 25,532 as interest from State Bank of India and two sister concerns. It also incurred an interest obligation of Rs. 2,666 on its loan to the extent of Rs. 1 lakh from State Bank of India. It is not in dispute that the interest receipt was from advances made out of paid-up capital amounts. The assessee filed a nil return and contended that the interest receipt had been credited to pre-operative expenses account and that it should be treated as reduction in the project cost and not income in the ordinary sense of the word. An extract from a publication issued by the Research Committee of the Institute of Chartered Accountants of India was furnished in support of its stand. The ITO, however, took the view that the entire amount is taxable and that there is no deduction possible either in respect of interest paid or other expenses. In this view he brought the entire amount of Rs. 25,532 to tax. This was confirmed in appeal. The assessee is, therefore, in second appeal.

3. When the case came to be heard by the Madras Bench 'B' of the Tribunal, it was noticed that there were conflicting decisions of this Tribunal on the question of treatment to be accorded to interest receipts during the pre-commencement period. The issue was sought to be referred to a Special Bench and consequently the appeal is now before us.

4. The learned counsel for the assessee pointed out that the assessee has not yet commenced its business and is engaged in the process of construction of the factory and erection of plants and machinery. He repeated the stand taken by the assessee before the authorities below. He sought to derive support from an extract from a publication of the Research Committee of the Institute of Chartered Accountants of India buttressed by a further opinion of the Export Advisory Committee of the same Institute. He also relied upon the decisions of this Tribunal in IT Appeal No. 558 (Mds.) 1975-76 dated 28-2-1977 and a decision of the Patna Bench of this Tribunal in Bihar Alloy Steel Ltd. v. ITO (a copy of which was filed). Our attention was also drawn to the recent decision of the Special Bench of the Tribunal at Hyderabad on the same issue in IT Appeal No. 15 (Hyd.) of 1980 dated 28-10-1981, to which one of us (Vice-President) was a party. The learned counsel also placed heavy reliance on the decision of the Supreme Court in the case of Challapalli Sugars Ltd. v. CIT [1975] 98 ITR 167.

5. The learned departmental representative submitted that the decision of the Special Bench at Hyderabad would require reconsideration. He claimed that the accounting practice authorised by the Institute of Chartered Accountants cannot decide the issue as to whether the receipt has the character of income or not. He pointed out that Madras High Court in the case of CIT v. L.G. Balakrishnan & Bros. (P.) Ltd. [1974] 95 ITR 284 was disinclined to base its decision on commercial or accountancy practice. He claimed that this decision of the Madras High Court was approved in the decision of the Supreme Court in the case of Challapalli Sugars Ltd. He relied upon the decisions of this Tribunal in IT Appeal Nos. 1559 and 1560 (Mds.) 1978-79 and another decision reported in the November 1981 issue of Taxman at page 191. He also claimed that in view of the decision of the Madras High Court in the case of Addl. CIT v. Madras Fertilizers Ltd. [1980] 122 ITR 139, we have no option except to confirm the assessment. Whatever might be the accounting practice, he claimed that the income was interest from deposit and was, therefore, squarely assessable under section 57 of the Income-tax Act, 1961 ("the Act"). No deduction was possible therefrom, according to him, in view of the decision in Madras Fertilizers' case. He also sought to distinguish the Hyderabad Special Bench decision in the case of Nagarjuna Steel Ltd., by pointing out that the facts in the assessee's case show that the amount by way of deposit was from funds received as paid up capital and not by borrowings as in the Hyderabad case.

6. We have carefully considered the records as well as the arguments. The facts are very clear. During the accounting year, the assessee was continuing the construction activities. The business in the manufacture of pyrotechnic aluminium powder was yet to commence. The funds were deposited with the Bank and parties pending their utilisation in construction of factory and erection of plants. The assessee has treated the receipt by way of interest as an amount which goes to reduce the project cost. Such a treatment is warranted by accounting practice as pointed out with reference to the publication of a professional body relating to accountancy. The Supreme Court in the case of Challapalli Sugars Ltd. referred to various text books of accountancy and the Statement on auditing practices issued by the Institute of Chartered Accountants of India as relevant for accepting the assessee's plea in that case that interest paid on amount borrowed for acquiring and installing machinery and plant for a period prior to the commencement of production would be part of actual cost of such machinery and plant. The Madras High Court in the case of L.G. Balakrishnan & Bros. had not dismissed the accountancy practice as irrelevant, but had only pointed out that it is not conclusive. In fact, it quoted with approval the opinion of Lord Viscount Simonds in Duple Motor Bodies Ltd. v. Ostime 139 TC 537 (HL) reproduced in the said decision in L.G. Balakrishnan & Bros. (P.) Ltd.

"The practice of accountants, though it were general or even universal could not by itself determine the amount of profits and gains of a trade for tax purposes... Normally a court attaches great weight to the view of the accountancy profession though the court must always have the last word (per Lord Reid)."

It therefore follows that Madras High Court also helds that "great weight" should be attached "to the view of the accountancy profession though the Court must always have the last word".

7. The assessee's claim is nothing more than an application of the principle laid down by the Supreme Court in the case of Challapalli Sugars Ltd. to converse facts. Where an assessee pays interest on funds during construction, such interest income goes to increase the project cost. That is the law laid down by the Supreme Court on the strength of accountancy practice. If an assessee also earns interest, it can only go to set off that interest cost of the project. In other words, if the interest paid exceeds interest received, it is only the net interest that is reckoned as capital cost. Interest receipt which goes to partially off set the interest payment cannot be considered as income. It can only be an abatement of cost. Could the treatment be different merely because the interest receipt happens to be larger than interest payment as it happens in this, assessee's case for this year ? Hence, the allowance of the assessee's claim in this case could be no more than mere application of the accepted accountancy rule approved in the decision of Challapalli Sugars Ltd. The accountancy principle regarding capitalisation of interest payment is no different from the accountancy principle enabling the interest receipt to be treated as reduction in cost. This is the common accountancy and legal principle which was accepted by the Special Bench.

8. The decision of the Madras High Court did not deal with the issue as to whether interest income itself has the character of income in the hands of the assessee who has earned it while deploying the funds temporarily during the period prior to production. The taxability of interest receipt was not the issue before the Court. The issue before the Court was whether the interest paid by the assessee was deductible from such income. It was for this reason that the Special Bench at Hyderabad found that the decision in this case did not apply to the facts under consideration.

9. It is the assessee's case that the deposits were not in the nature of investments and were put to intermediate use pending utilisation of these funds for construction activities. In fact, the assessee contemplated the necessity of further funds and had even gone to the extent of borrowing from the Bank. On these facts, the Accountancy Rule, the decision of the Supreme Court in Challapalli Sugars Ltd. and the decision of the Hyderabad Special Bench should be held applicable. These facts do not stand contradicted. The alleged distinction between the Hyderabad Special Bench case and this case as to the source of deposits, whether out of paid-up capital or borrowed funds, in our opinion, is a distinction without a difference. What is relevant is that these are not long-term lendings or investments and that these interest receipts are in the course of entrustment of safe custody of funds to bank, while awaiting use in the capital project.

10. Section 56 of the Act authorises assessment under other sources of income of every kind which is not chargeable under any of other heads specified in section 14 of the Act. Neither the definition of "income" under section 2(24) of the Act nor any of the items listed under section 56(2) nor any of the deeming provisions of the Act stipulate that interest in every case must be income though it is ordinarily so because interest is ordinarily a "flow" from source "fund". It is not so in this case as there is no expected regular flow. No doubt, section 2(24) is only an inclusive definition. But even ordinary concept of income as "a periodical monetary return 'coming in' with some sort of regularity, or expected regularity from definite sources"---Sir John Loundes in CIT v. Shaw Wallace 6 ITC 178---cannot include such receipt which go to reduce cost. It is not income in the sense of a "fruit" from a tree or the crop of a field or a produce from a capital. It is not every receipt which constitutes income. Even in a running business items like sale of gunny bags or other containers, discount received on purchase, etc., only go to reduce cost of goods and cannot be treated as constituting income independently by themselves. It is in this view that the businessman and accountants consider receipt of interest during construction in the pre-commencement period as an abatement of project cost and not as income. Hence, the argument of the learned departmental representative that accounting practice is necessarily divorced from the requirement of taxation law does not meet the point. It is not that the Supreme Court while accepting the accountancy rule authorised interest paid as a revenue expenditure while allowing the assessee to capitalise the interest during pre-commencement period. It allowed capitalisation only because it was not normal expenditure and it could not be business expenditure before business commenced. Similarly, excess of interest received over interest paid has to be treated as a reduction in project cost only because it is not income in the ordinary sense. Hence, we have no doubt there is no variation between tax treatment and accountancy practice in the present dispute before us especially after the decision of the Supreme Court on the question of capitalisation of interest in Challapalli Sugars Ltd.

11. In the result, the appeal is allowed and the assessment annulled.

 

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