1. This is an appeal by the assessee against the decision of the Commissioner (Appeals) refusing to allow its claim to exclude a sum of Rs. 12,809 from its income. The assessee-company was incorporated on 30-9-1974 with an authorised capital of 1,12,500 shares of face value of Rs. 10 each. It obtained a certificate of commencement of business on 16-1-1975. It called for subscription for its shares. They were heavily over-subscribed and the company received a total sum of Rs. 25,21,500 from the prospective shareholders. As this was far in excess of the company's requirements, the money was kept in short-term fixed deposits and interest of Rs. 14,232 was earned in the relevant accounting year. The assessee had also borrowed moneys from banks on overdraft and had paid interest of Rs. 20,196. Before the ITO, it was claimed that the interest of Rs. 14,232 was not a taxable receipt and in the alternative the amount should be allowed as an expenditure against its income. The ITO rejected the claim of the assessee that the income was not taxable. He, however, held that a reasonable amount of expenditure had to be allowed for earning the interest. This expenditure was estimated at 10 per cent of the receipts, i.e., Rs. 1,423. He, accordingly, taxed the balance of Rs. 12,809.
2. The matter went before the Commissioner (Appeals). Before him, the assessee raised a contention that the interest income was to be set off against the expenditure for erection of the factory and relied upon a decision of the Tribunal, Patna Bench "B", in the case of Bihar Alloy Steel Ltd. v. ITO. Reliance was also placed on the decision of the Delhi High Court in the case of CIT v. Bharat Steel Tubes Ltd. The Commissioner (Appeals) held that the applicants for the shares of the company were entitled to the refund of the share application money in the event of the shares not being allotted to them ; such persons had no right for the interest earned by the company on the fixed deposits.
The sum of Rs. 14,232 was definitely income of the assessee. He then examined the question of allowing some expenditure against the interest receipts. The assessee had capitalised a part of the interest payments on the basis of the Supreme Court decision in the case of Challapalli Sugars Ltd. v. CIT [1975] 98 ITR 167. The Commissioner (Appeals) further observed that the interest received by the assessee cannot be called a capital receipt and as such cannot be adjusted against the expenditure incurred for erection of the building, plant and machinery.
Since there can be no adjustment between the revenue receipt and capital expenditure and this aspect had not been considered By the Patna Bench of the Tribunal and also having regard to the provisions of Section 70(2)(ii) of the Income-tax Act, 196] ("the Act"), which provides for the carry forward of capital losses, he came to the conclusion that the interest received by the assessee cannot be allowed to be set off against the capital expenditure incurred. He also held that the facts of Bharat Steel Tubes Ltd. (supra) were distinguishable from those of the assessee. He agreed with the ITO that the expenditure allowed was reasonable and dismissed the assessee's appeal.
1. The assessee is engaged in the activities of raising share capital and as such all expenditure which is related to such activity should be set off against the income received.
2. The Commissioner (Appeals) was not right in holding that the only activity of the assessee for earning the interest income was that of depositing the share application money in the bank and, therefore, the expenditure allowed by the ITO was reasonable.
An additional ground was also raised to the effect that the Commissioner (Appeals) erred in rejecting the claim of the assessee to set off interest income against the expenditure for the erection of the factory.
4. The learned counsel for the assessee, Shri J.P. Shah, submitted that the assessee's claim has to be examined under two heads : firstly, "Profits and gains of business or profession", and then "Income from other sources". The assessee was carrying on a business, the business had also been set up and hence whatever expenditure was incurred was for the purposes of the business and allowable under Section 37 of the Act. Even if the claim were to be considered under the head "Income from other sources", the conditions prescribed under Section 57 (Hi) of the Act were satisfied. The assessee had to incur considerable expenditure in getting subscribers for its shares. Part of the salary of the secretary, finance manager and stenographer, could be attributed to these activities. The expenditure of Rs. 52,056 this Rs. 5,909 on advertisements, issue of prospectus, etc., were also wholly attributable to these activities. There were also other connected activities and the expenditure on these, which came to Rs. 70,952, was far in excess of the income earned by the assessee from short-term deposits. It was, thus, pleaded that there was no income to be assessed. In the alternative, it was urged that this income from interest only went to reduce the capital expenditure incurred by the assessee and so it was proper to set off this income against the expenditure incurred in erecting the factory and capitalising the balance. In support, Shri Shah, relied upon certain principles of accountancy which permitted set off of miscellaneous income against capital expenses incurred during the pre-production period. It was further urged by Shri Shah that this matter had been decided in the assessee's favour by the Patna Bench of the Tribunal in the case of Bihar Alloy Steel Ltd. (supra).
5. The learned departmental representative, Shri Kathuria, submitted that in the first instance the assessee had already accepted that the sum of Rs. 14,232 constituted its income, since there is no specific ground raised by the assessee against this finding of the learned Commissioner (Appeals). He next relied on the extracts from the director's report on the balance sheet as on 31-12-1975. The report specifically stated that as the company did not commence production, profit and loss account had not been prepared for the period ending 31-12-1975. The report further stated that all the imported machineries and equipments had arrived at the factory site. The learned departmental representative further urged that the facts clearly showed that the assessee had not commenced business. Once it was accepted that the business had not commenced, the interest income earned by the assessee could only fall under the head "Income from other sources".
Under the head "Income from other sources", the allowable expenditure is rigidly controlled by the conditions prescribed under Section 57(m).
These conditions are far more rigorous than the conditions stipulated under Section 37. While under Section 37 it is enough if the expenditure is for the purposes of the business, under other sources, the expenditure should be for the purposes of earning the income. It was submitted that there should be a direct nexus between the expenditure and the earning of the income as held by the Gujarat High Court in the case of Smt. Padmavati Jaikrishna v. CIT [1975] 101 ITR 153. In the present case, it cannot be said that the purpose of appointing the secretary, finance manager, stenographer, etc., and incurring expenditure on advertisements, etc., was for the purpose of obtaining money far in excess of the company's requirement of share capital and to invest the excess in fixed deposits for the purpose of earning income. The expenditure incurred by the assessee prior to the commencement of the business had no immediate connection with the money earned by the assessee by investing share application money received in excess of its requirement in short-term deposits. The learned departmental representative, forcefully supported the Commissioner (Appeals) in his finding that the Patna Bench of the Tribunal had not considered whether an income which has accrued to the assessee could be exempted from taxation ; merely because it was appropriated against the capital expenditure. The learned departmental representative submitted that the taxability of income does not depend upon the entries made in the books of account- CIT v. Hind Construction Ltd. [1972] 83 ITR 211 (SC). Once an income has accrued, it becomes taxable. The income so accrued cannot be swept under the carpet of capital expenditure, as it was opposed to law.
6. We have heard the rival submissions. In our opinion, the revenue is entitled to succeed. There is no doubt that the interest earned on fixed deposits is income of the assessee. It cannot be said that the assessee had commenced business, since the directors' report itself admits that they had not commenced production and the machinery had arrived on factory site. There is nothing on the record to suggest that the machinery was set up and the company was in a position to start production. Hence, the assessee's claim to deduct expenditure under the head "Profits and gains of business or profession" fails.
7. Since the interest income earned by the assessee falls under the head "Income from other sources", we have to examine whether the expenditure incurred by the assessee relates to the earning of that income. In this connection, we are bound by the decision of the Gujarat High Court in Padmavati Jaikrishna (supra). We agree that the arguments advanced by the learned departmental representative that there is no nexus between the earning of the interest income and the expenditure incurred by the company on its staff, and on issue of advertisements, etc. After receiving the share application money, some expenditure is incurred by the assessee in the process of depositing these moneys in the bank. It is this expenditure which is related to the earning of the income which the TTO has estimated at 10 per cent of the receipts and we do not think that the expenditure allowed by him is unreasonably low.
8. We are also in agreement with the learned Commissioner (Appeals) that the Patna Bench did not consider certain aspects of the matter.
The revenue receipts and capital expenditure are two different things.
A revenue account cannot be mixed up with capital account for the purposes of determining the income which is to be taxed. For certain economic reasons, it may be prudent to utilise revenue receipt in a particular manner, namely, in acquiring a capital asset, but that is only a question of appropriation. A revenue receipt utilised for meeting capital expenditure cannot alter its taxability. The company might feel it prudent to capitalise a smaller amount by meeting the capital expenditure out of revenue but that does not affect the taxability of the receipts. We, therefore, do not see any reason to differ from the learned Commissioner (Appeals).