Kerala High Court
Commissioner Of Income-Tax vs Cochin Shipyard Ltd. on 23 September, 1999
Equivalent citations: [2000]108TAXMAN112(KER)
Bench: Arijit Pasayat, K.S. Radhakrishnan
JUDGMENT Pasayat, CJ.
Pursuant to the direction given by this Court in an application under section 256(2) of the Income Tax Act, 1961 (hereinafter referred to as 'the Act'), the following question has been referred for the opinion of this Court by the Tribunal, Cochin Bench:
"Whether, on the facts and in the circumstances of the case, the interest received from the contractors on loans advanced to them by the assessee is a capital receipt reducing the cost of the plant ?"
2. The factual position, as indicated in the statement of the case, is as follows :
The assessee was constructing the Shipyard at Cochin during the assessment year 1975-76. It had engaged various contractors for carrying out the civil and other construction work. As per the terms of the contract, the assessee was required to provide sufficient funds to them from time-to-time to carry out the work without interruptions. The assessee charged interest on the amounts advanced to the contractors and during the previous year relevant to the assessment year in question, the interest so charged by the assessee amounted to Rs. 26,90,680 on the amounts advanced by the assessee to the contractors. The amounts relatable to the respective contractors so far as interest is concerned was adjusted by the assessee against the contract amounts payable to them. In the assessment proceedings, the assessee claimed that the interest was part of the capital cost, and, hence, not liable to tax.
3. The assessing officer did not accept the stand of the assessee and brought the amount to tax. But the first appellate authority, i.e., the Commissioner (Appeals) held that the interest amount was not taxable. It was observed that the amount was subsequently recovered by the assessee from the contract amount and, therefore, it was not taxable. The matter was carried in appeal by the revenue before the Tribunal who accepted the view of the Commissioner (Appeals) and dismissed the appeal preferred by the revenue. An application under section 256(1) was not accepted and that is why an application under section 256(2) was filed and direction was given for referring the question.
4. The learned counsel for the revenue submitted that the first appellate authority as well as the Tribunal lost sight of the fact 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.
Therefore, the amount was clearly taxable. The learned counsel for the assessee, on the other hand, submitted that no amount reached the hands of the assessee as income and, therefore, the conclusions of the first appellate authority and the Tribunal were in order.
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 section 4 of the Act, 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.
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 or any other provision of the Act.
Under the Act, 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 of the Act 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. This view has been expressed by the Apex Court in Tuticorin Alkali Chemicals & Fertilizers Ltd. v. CIT (1997) 227 ITR 172/93 Taxman 502.
That being the position, the question referred has to be answered in the negative, in favour of the revenue and against the assessee.
The reference is disposed of accordingly.