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Commissioner Of Income-Tax Bihar-Ii, ... vs Bokaro Steel Limited, Bokaro on 18 December, 1998 cites

Tuticorin Alkali Chemicals And ... vs Commissioner Of Income Tax, Madras on 8 July, 1997

The appellant, however, relied upon the decision of this Court in Tuticorin Alkali Chemicals and Fertilizers Ltd. v. Commissioner of Income-tax (supra). That case dealt with the question whether investment of borrowed funds prior to commencement of business, resulting in earning of interest by the assessee would amount to the assessee earning any income. This Court held that if a person borrows money for business purposes, but utilizes that money to earn interest, however temporarily, the interest so generated will be his income. This income can be utilized by the assessee whichever way he likes. Merely because he utilized it to re-pay the interest on the loan taken, will not make the interest income as a capital receipt. The department relied upon the observations made in that judgment (at page 179) to the effect that it the company, even before it commences business, invests surplus funds in its hands for purchase of land or house property and later sells it at profit, the gain made by the company will be assessable under the head "capital gains". Similarly, if a company purchases rented house and gets rent, such rent will be assessable to tax under Section 22 as income from house property. Likewise, the company may have income from other sources. The company may also, as in that case, keep the surplus funds in short-term deposits in order to earn interest. Such interest will be chargeable under Section 56 of the Income-tax Act. This Court also emphasised the fact that the company was not bound to utilize the interest so earned to adjust it against the interest paid on borrowed capital. The company was free to use this income in any manner it liked. However, while interest earned by investing borrowed capital in short-term deposits is an independent source of income not connected with the construction activities or business activities of the assessee, the same cannot be said in the present case where the utilisation of various assets of the company and the payments received for such utilisation are directly linked with the activity of setting up the steel plant of the assessee. These receipts are inextricably linked with the setting up of the capital structure of the assessee-company. They must, therefore, be viewed as capital receipts going to reduce the cost of construction.
Supreme Court of India Cites 23 - Cited by 796 - Full Document

The Godhra Electricity Co. Ltd. ... vs The Commissioner Of Income Tax, ... on 3 April, 1997

In support of this finding, the assessee has drawn our attention to a decision of this Court in Godhra Electricity Co. Ltd. v. Commissioner of Income-tax ([1997] 225 ITR 746) where the Court, inter alia, examined the case system and the mercantile system of accounting in the context of hypothetical income. The computation of income is made in accordance with the method of accounting regularly employed by the assessee. It may be either the case system where entries are made on the basis of actual receipts and actual outgoings or disbursements; or it may be the mercantile system where entries are made on accrual basis, that is to say, accrual of the right to receive payment and the accrual of the liability to disburse or pay. However, in both cases unless there is real income, there cannot be any income-tax. Considering the facts before it, the Court said that although the assessee-company was following the mercantile system of accounting and had made entries in the books regarding enhanced charges for the supply of electricity made to its consumers, no real income had accrued to the assessee-company in respect of those enhanced charges in view of the fact that soon after the assessee-company decided to enhance the rate, representative suits were filed by the consumers which were decreed by the court and ultimately, after various proceedings which took place, the assessee-company was not able to realise the enhanced charges. The Court held that no real income had accrued to assessee-company and hence the entries in respect of enhanced charges did not reflect the real income of the assessee and could not be brought to tax by the Income-tax Officer.
Supreme Court of India Cites 8 - Cited by 515 - S C Agrawal - Full Document

Addl. Commissioner Of Income-Tax, New ... vs Indian Drugs And Pharmaceuticals Ltd. on 17 September, 1981

In the case of Addl. Commissioner of Income-tax, New Delhi V. Indian Drugs and Pharmaceuticals ltd. ([1983] 141 ITR 134), the Delhi High Court considered a case where the work of construction of the factory of the assessee was in progress and production had not commenced. receipts from sale of tender forms and supply of water and electricity to the contractors engaged in construction as also receipts on account of sale of stones, boulders, grass and trees were held to be receipts not from independent sources but were considered as inextricably linked with the process of setting up of business. These were directly related to the capital structure of business and were held to be capital in nature. We agree with this view taken by the Delhi High Court.
Delhi High Court Cites 4 - Cited by 36 - S Ranganathan - Full Document

Challapalli Sugar Ltd vs The Commissioner Of Income Tax, A.P. ... on 31 October, 1974

In the case of Challapalli Sugars Ltd. v. Commissioner of Income-tax, A.P. ([1975] 98 ITR 167), this Court examined the question whether interest paid before the commencement of production by a company on amounts borrowed for the acquisition and installation of plant and machinery would form a part of the actual cost of the asset to the assessee within the meaning of that expression in Section 10(5) of the Indian Income-tax Act, 1922 and whether the assessee will be entitled to depreciation allowances and development rebate with reference to such interest also. The Court held that the accepted accountancy rule for determining cost off 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 of such borrowed money can be capitalised and added to the cost of the fixed assets created as a result of such expenditure. By the same reasoning if the assessee such expenditure. By the same reasoning if the assessee receives any amounts which are inextricably linked with the process of setting up its plant and machinery, such receipts will go to reduce the cost of its assets. These are receipts of a capital nature and cannot be taxed as income. The same reasoning would apply to royalty received by the assessee company for stone etc. excavated from the assessee company's land. The land had been allowed to be utilized by the contractors for the purpose of excavating stones to be used in the construction work of assessee's steel plant. The cost of the plant to the extent of such royalty received, is reduced for the assessee. It is therefore, rightly taken as a capital receipt. In the assessment year 1971-72, the assessee had shown in its books of accounts a sum of Rs.7,39,232/- as income from interest received from M/s. Hindustan Steel Ltd. for the eight locomotives supplied by the assessee-company to them. The entry in this regard was reversed in the next year since M/s. Hindustan Steel ltd. had replaced the eight locomotives lent by the assessee-company to it by new ones. The entire nature of the transaction was changed between the parties. There was a resolution of the assessee-company in this regard and the income from interest did not result at all as the original agreement ceased to be operative ab initio. The entry in the books which was made was about a hypothetical income which did not materialise and the entry was reversed in the next year. Both the Tribunal as well as the High Court have held that since this entry reflected only hypothetical income, it could not be brought to tax as income. Only real income can be brought to tax.
Supreme Court of India Cites 28 - Cited by 416 - H R Khanna - Full Document
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