Judgment:
1. This appeal of the assessee was originally disposed of by the Tribunal videorder dated February 10, 1999. Thereafter, the revenue moved a miscellaneous application under section 254(2) of the Income-tax Act (hereinafter called 'the Act') slating therein that the issue whether the netting is permissible between the interest income and the interest paid on borrowings in case when the interest income is considered under the head "income from other sources", was not adjudicated by the Tribunal in the light of various judicial pronouncements referred to by the parties. Finding force in the miscellaneous application of the revenue, the Tribunal recalled its original order dated 10th February, 1999 on a limited issue "whether the netting between the interest income and the interest paid on borrowings in case where the income is considered under the head 'income from other sources' is permissible"? Vide its order dated 16th August, 1999. Accordingly, both the parties were heard on the aforesaid issue.
2. Shri Brijesh Gupta, the learned Senior Departmental Representative, has strongly argued that once the interest income is treated as income from other sources, only those expenditure (not being in the nature of capital expenditure) laid out or expended wholly and exclusively for the purpose of making or earning such income, are deductible from the interest income as per section 57(iii) of the Act. He also invited our attention to the provisions of section 36(1)(iii) of the Act and contended that as per this clause all interest paid in respect of the capital borrowed for the purpose of business or profession is to be deducted from the income computed as per section 28 of the Act. Section 36(1 )(m) of the Act has a wider amplitude than section 57(iiii) of the Act as all types of interest paid in respect of capital borrowed for the purpose of business or profession is deductible from the income from business or profession whereas under section 57(iii) deduction of only that expenditure is allowable from the income from other sources which has been spent wholly and exclusively for the purpose of earning that income. In support of his contention, the learned Senior Departmental Representative has relied upon the following judgments :--Kanmtaka Forest Plantations Corpn, Ltd v. CIT [1985] 156 ITR 275 (Kar.) (iii) Tuticorin Alkali Chemicals & Fertilizers Ltd. v. CIT[1997] 227 ITR 172' (SC) South India Shipping Corpn. Ltd. v. CIT[1999] 240 ITR 24! (Mad.) CITv. Amritaben R. Shah [1999] 238 ITR 7773 (Bom.) 3. Shri M.C. Mehta, learned counsel for the assessee on the other hand has argued that whenever the asscssee makes an investment and the interest income was earned thereon, netting should be allowed between the interest income and the interest paid on the borrowed capital which was invested for earning interest income. He further contended that the view taken by the Hon'ble Apex Court in the case of Tuticorin Alkali Chemicals & Fertilizers Ltd. (supra) was reversed by the Hon'ble Apex Court in the case of CIT v. Bokaro Steel Ltd. [1999] 236 ITR 315. He further submitted that the cases relied upon by the learned DR is distinguishable on facts as in those cases the business was nut commenced and the asscssee was in the process of setting up its business, but in the instant case the assessee's business has been commenced and during the course of business the assessee has made certain investments out of the borrowed capital on which certain interest income was earned. As such, netting between the interest received and the interest paid on borrowed capital, which was invested for earning the aforesaid interest income, should be done while taxing the interest income as income from other sources.
4. We have heard the rival submissions of the parties and carefully perused the relevant provisions in the light of various judicial pronouncements referred to by the parties. It is true that under section 36(1)(m) interest paid on borrowed capital is to be allowed as deduction while computing the income from business or profession as per section 28 of the Income-tax Act. But section 56 deals with the income from other sources and certain deductions, which are allowable while computing the income from other sources, are given in section 57 of the Act. Sub-section (iii) of section 57 deals with those expenditure which are laid out or expended wholly or exclusively for the purpose of making or earning the income from other sources. If we read the provisions of sections 28,36, 56 and 57 of the Act simultaneously we would find that if the income is considered under the head "income from business or profession" only those deductions are allowable which find place in section 36 of the Act and likewise if the income is treated to be the income from other sources, only those deductions are allowable which are enumerated in section 57 of the Act. Hence, while computing the income from other sources only that expenditure is allowed to be deducted which is laid out or expended wholly or " exclusively for the purpose of making or earning such income, as per section 57(iii) of the Act. The expression used for the purpose of business or profession in section 36(l)(m) has a wider amplitude than section 57(iii) in which the Legislature has used the expression "expenditure laid out or expended wholly or exclusively for the purpose of making or earning such income". A similar view was also expressed by the Apex Court in the case of MadhavPrasadJatia (supra). While dealing with an identical issue, their Lordships of the Karnataka High Court has held in the case of Karnataka Forest Plantations Corpn. Ltd. (supra) that in a taxing Act one has to look merely at what is clearly said. There is no room for any intendment. The deduction under section 57 of the IT Act, 1961 is allowable only if it falls within one or the other of the clauses enumerated in that section and not otherwise. If the borrowings were not made to make investments and earn interest from them but the borrowed amounts kept in short-term deposits undoubtedly yielded some interest, the interest income was totlly independent of the borrowings and the interest payable on such borrowings was, therefore, not deductible under section 57 (iii) of the Act. A similar view was also expressed by the Hon'ble Bombay High Court in the case of Ainritaben R.Shah (supra) in which their lordships have held that the expenditure incurred by way of interest on the loan taken by the assessee for the purpose of acquiring controlling interest in the company, could not be held to be an expenditure incurred wholly and exclusively for the purpose of earning income by way of dividend. In order to get deduction under section 57 (iii) of the Act the expenditure should be incurred wholly and exclusively for the purpose of "making or earning the income from other sources". In order that an expenditure may be admissible under section 57(iii) of the Act, it is necessary that the primary motive of incurring it is directly to earn income falling under the head "income from other sources". Unlike, section 37 which allows deduction of expenditure "incurred wholly or exclusively for the purpose of business" under section 57(iii), deduction will not be allowed if the expenditure is not incurred for the purpose of earning income falling under the head "income from other sources".
5. Though the facts of the case of Tuticorm Alkali Chemicals & Fertilizers Ltd. (supra) are not identical with the facts of the case in hand but the principle laid down by the Apex Court in that case is strictly applicable to the case in hand. Their Lordships of the Apex Court have categorically held in that case that in order to earn income out of the surplus funds, it had invested the amount for the purpose of earning interest and the interest thus earned was clearly of revenue nature and would have to be taxed accordingly. The accountants might have taken some other view but accountancy practice was not necessarily good law. The assessee was entirely at liberty to deal with the interest amount as it liked. Since the business of the assessee had not started, the expenditure incurred by the "assessee for the purpose of setting up its business could not be allowed as deduction nor could it be adjusted against any income against any other head. Similarly, any income from a non-business source could not be set off against the liability to pay interest on funds borrowed for the purpose of purchase of plant and machinery even before the commencement of the business of the assessee. Our attention was also invited to the latest judgment of the Madras High Court in the case of South India Shipping Corpn. Ltd. (supra) in which their lordships have held after relying upon the judgment in the case of Tuticorin Alkali Chemicals & fertilizers Ltd (supra) that under the Income-tax Act, 1961, the distinct heads under which the income of an assessee arc to be classified arc set out in section 14 of the Income-tax Act, 1961. The income received by an assessee has to be fitted under one or other head having regard to the source from which that income is derived. The fact that a person carries on the business does not lead to the inference that all income received by such person is business income. The same assessee can have income which may require to be classified under more than one head. It is the manner in which the income is derived that is relevant and not merely the fact that the person is engaged in a business or in a profession. Interest received by a company which carries on business from bank deposits and loans could only be taxable as "income from other sources" and not as "business income" and the interest paid on overdraft obtained for the purpose of business cannot be deducted from the interest earned on monies kept in fixed deposits has to be taxed under the head "Income from other sources". However, though the assessee may not be entitled to have interest paid by it on the overdraft to the bank, deducted from the interest received by it on the short-term fixed deposits, the assessee is entitled to deduction of the same from its business income.
6. We have also carefully perused judgment of the Apex Court in the cast of Bokaro Steel Ltd, (supra) on which the assessee has placed strong reliance and we find that while deciding this appeal their Lordships of the Apex Court have also considered the judgment rendered by them in the case of Tuticorin Alkali Chemicals & Fertilizers Ltd. (supra). As such, the stand of the assessee that the view of the Apex Court has been reversed in the case of Bokaro Steel Limited(suprd) is not correct. In this case their Lordships have categorically held that when the 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 the production on such borrowed money can be capitalised and added to the cost of assets created as a result of such expenditure. By the same reasoning if the assessee receives any amounts, which are intrinsically linked with the process of setting up of any plant or machinery, such receipts will go lo reduce the cost of its assets.
7. We have also examined the following judgments which have beer referred to by the assessee in support of his contention:-- 8. From a careful pcrsual of the relevant provisions of the taxing Act in the light of the aforesaid judicial pronouncements and the rival submissions, we are of the view that while computing the income under the head "income from other sources" under section 56 of the Act, only those deductions arc allowed to be deducted which are enumerated under section 57 of the Act. The deductions claimed under section 36 of the Act cannot be allowed to be deducted from the income from other sources while computing the same under section 56 of the Act. As per section 57(iii) only those expenditure which are wholly or exclusively incurred for earning the income from other sources are allowed to be deducted from the income from other sources. In the light of this analogy if we examine the case in hand we would find that the borrowed fund was invested for earning interest thereon and the interest income is not as income from business but it is an income from other sources.
Undoubtedly, if the assessee has borrowed certain funds, he must have paid some interest thereon but for allowing netting between the interest received, which was considered as an income from other sources and the interest paid on borrowed funds, one has to find out whether the fund was borrowed only for the investment on which the aforesaid interest income was earned. If the fund was borrowed for making its investment other than the business purpose and the interest earned on such investment is considered to be the income from other sources, then netting between the interest paid and the interest received is allowed.
But if the assessee borrowed the funds for its business purpose and the same was not used for its business purpose but was invested somewhere else on which the interest was earned by the assessee and the interest income was treated as income from other sources, the assessee would not be entitled for netting between the interest income and the interest paid on the borrowed funds because the so-called interest paid cannot be termed as expenditure incurred wholly and exclusively for earning the income from other sources. In the instant case, the assessee has admittedly earned interest income of Rs. 32,101,74 on the advances made to sister concern and this income was held to be the income from other sources by order dated February 10,1999. It is also an admitted fact that originally the fund was borrowed for business purpose but later on it was advanced to the sister concern and the assessee had earned income thereon. Since the funds were not borrowed exclusively for the purpose of advancing it to the sister concern and for earning interest income, the assessee is not entitled for netting between the interest received and the interest paid on borrowed fund. We, therefore, hold that the netting is not permissible between the interest received, and interest paid on funds borrowed for business purpose.