G.G. Sohani, Actg. C.J.
1. By this reference under Section 256(1) of the Income-tax Act, 1961 (hereinafter referred to as 'the Act'), the Income-tax Appellate Tribunal, Indore Bench. Indore, has referred the following question of law to this court for its opinion :
'Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the interest of Rs. 50,116 (rounded off to Rs. 50,120), was not taxable as the assessee's income ?'
2. The material facts giving rise to this reference, briefly, are as follows : The assessee is a public limited company. The assessee established a factory for the manufacture and production of electro-graphites and theproduction commenced on May 1, 1977. During the accounting year relevant to the assessment year 1978-79, the assessee derived income of Rs. 50,116 as interest on fixed deposits and interest on late payment of call money. The Income-tax Officer held that this amount was taxable as the assessee's income. Aggrieved by that order, the assessee preferred an appeal before the Commissioner of Income-tax (Appeals). The Commissioner of Income-tax (Appeals) held that the period of accounting year under consideration was only from January 1, 1977, to April 30, 1977, and interest income for these four months before the commencement of production was not taxable, The Revenue thereupon preferred an appeal before the Tribunal, but the Tribunal dismissed that appeal. Aggrieved by the order passed by the Tribunal, the Revenue sought reference and it is at the instance of the Revenue that the aforesaid question of law has been referred to this court for its opinion.
3. The Commissioner of Income-tax (Appeals) has found that interest income earned prior to January 1, 1977, had already been considered in the preceding account year and that the Inspecting Assistant Commissioner had erred in assessing the income for the period from May 1, 1977, to December 31, 1977. This finding was not assailed before the Tribunal and hence the Tribunal was only required to consider the question as to whether the interest income from January 1, 1977, to April 30, 1977, was taxable as the assessee's income. The amount of Rs. 50,116 referred to in the question framed by the Tribunal included interest income from May 1977 to December 1977 though that amount had to be excluded from consideration. We, therefore, reframe the question as follows :
'Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the interest income of Rs. 13,321 was not taxable as the, assessee's income ?'
4. Learned counsel for the Revenue contended that interest earned by a person prior to the commencement of business would be taxable as income from other sources and that the Tribunal erred in holding that such income was not taxable. Reliance was placed on the decisions in Madhya Pradesh State Industries Corporation Ltd. v. CIT : [1968]69ITR824(MP) and Traco Cable Co. Ltd. v. CIT : [1969]72ITR503(Ker) . In reply, learned counsel for the assessee contended that the income received by the assessee during the pre-production period has to be set off against interest expenses as required by the rules of accountancy and the Tribunal was, therefore, right in holding that the interest income was not assessable to tax. Reliance was placed on the decisions in Challapalli Sugars Ltd. v. CIT : [1975]98ITR167(SC) CIT v. Bokaro Steel Ltd. (No. 1) 0043/1987 : [1988]170ITR522(Patna) and CIT v. Nagarjuna Steels Ltd. : [1988]171ITR663(AP) .
5. In the instant case, the Tribunal has not found that the assessee had incurred interest expenses during the construction period and hence interest income earned during the construction period, was to be set off against interest expenses incurred during the period in question. It is true that the rules of accountancy require that where a particular item of miscellaneous income can be directly related to a particular item of expenditure, then it should be set off against the expenditure and the net amount of expenditure should be treated in an appropriate manner depending upon its nature in accordance with the principles of accountancy. In the instant case, however, the Tribunal has not found that the income earned by the assessee as interest on fixed deposit and on late payment of call money, is related to a particular item of expenditure. The decisions in CIT v. Bokaro Steel Ltd. (No. 1) 0043/1987 : [1988]170ITR522(Patna) and CIT v. Nagarjuna Steels Ltd. : [1988]171ITR663(AP) are, therefore, distinguishable on facts. In Challapalli Sugars Ltd. v. CIT : [1975]98ITR167(SC) the question for consideration was whether interest paid before the commencement of production on amounts borrowed by the assessee for the acquisition and installation of plant and machinery, formed part of the 'actual cost' of the assets. On the basis of that decision, it cannot be laid down, as held by the Tribunal, that even though a particular item of miscellaneous income is not found to be directly related to a particular item of expenditure, interest received by investing funds during the construction period should be adjusted against capital cost and cannot be taxed as income from other sources. In our opinion, in the absence of any finding that interest on fixed deposits and interest on late payment of call money was directly related to a particular item of expenditure, the Tribunal was not justified in holding that the interest income received by the assessee on fixed deposits and on late payment of call money was not taxable as the assessee's income.
6. For all these reasons, our answer to the question refrained by us is in the negative and against the assessee. In the circumstances of the case, parties shall bear their own costs of this reference.