High Court Of Punjab And Haryana
Karnal Co-Operative Sugar Mills Ltd. vs. CIT
Sections 56, 43(1), 57(iii), 80P(2)(c)
Asst. Year 1976-77, 1977-78
Ashok Bhan & N.K. Agrawal, JJ.
IT Ref. No. 73 & 74 of 1982
31st July, 1997
S.K. Mukhi, for the Assessee : R.P. Sawhney & S.K. Sharma, for the Revenue
N.K. AGRAWAL, J. :
The following questions of law have been referred under s. 256(1) of the IT Act, 1961, at the instance of the assessee :
“1. Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the interest of Rs. 1,60,778 and Rs. 2,23,500 was required to be taxed as income from other sources for the asst. yrs. 1976-77 & 1977-78, respectively ?
Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the interest earned in these two years should not be reduced from the cost of the assets ?
Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in not allowing deduction of Rs. 33,750 on account of letter of credit charges for the asst. yr. 1976-77 and Rs. 31,000 on account of letter of credit charges and Rs. 75,606 as interest paid on overdraft for the asst. yr. 1977-78 from interest income ?
Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that exemption under s. 80P(2)(c) was not allowable as the assessee did not have any income from business ?” Questions Nos. 1 and 2 :
The assessee is a co-operative society running a sugar mill. A return for the asst. yr. 1976-77 (year ending 30th June, 1975) was filed declaring loss amounting to Rs. 7,29,700 under the head “Business”. For the next assessment year, the assessee declared loss of Rs. 20,19,450. The assesseeâs factory had not commenced production either during the asst. yr. 1976-77 or the next year 1977-78. Sugar production had started from 1st Jan., 1977. Loss in both the years was shown on account of various expenses incurred in connection with the setting up of the factory. The AO, during the course of assessment for the asst. yr. 1976-77, noticed that a sum of Rs. 1,60,778 had been received by the assessee-company by way of interest on certain fixed deposits. Similarly, the assessee had received interest amounting to Rs. 2,23,500 during the next year. The assesseeâs plea was that the interest income was to be adjusted against the expenditure in both the years and thereafter, the balance expenditure shown as loss was to be treated as part of the capital expenditure.
The assessee went in appeal before the CIT against the levy of tax on the interest income, treating the same as income from other sources. The assesseeâs plea was that an agreement had been entered into with Engineering Project (India) Limited for the purchase of certain machines. A letter of credit was required to be opened in the bank for Rs. 30 lakhs in favour of the supplier of the machine. For that purpose fixed deposits had to be made so as to finalise the agreement for the purchase of the machine. A sum of Rs. 27.5 lakhs was, therefore, deposited in the fixed deposits and thereupon a letter of credit was opened. The deposit was, therefore, in the nature of margin money paid to the bank for opening a letter of credit in furtherance of the agreement. The assessee had, therefore, argued that whatever interest income was earned, that could not be treated to be income from other sources but as part of the business income inasmuch as the process of business had already commenced and the factory was being set up. Alternatively, it was argued that if the interest income could not be treated to be “income from businesthis should be adjusted and set off against the various expenditure incurred during the two years under assessment. The balance expenditure was required to be capitalised, being treated as part of the actual cost of the assets acquired by the assessee-company. The CIT did not agree with the assesseeâs plea and treated the interest income as “Income from other sources” and upheld the order of assessment.
The assessee went in further appeal before the Tribunal in both the years but could not succeed. Shri S.K. Mukhi, learned counsel for the assessee, has argued that his initial plea would be to treat the interest income as “business income” inasmuch as various activities had been undertaken by the assessee-company and those activities in the light of the objects specified in the bye laws were in the nature of business activities of the company. His next argument is that if the activities of the company are not treated to be activities concerning the main objects, the income earned by way of interest should go to reduce the cost of assets acquired, in the same manner as the expenditure has been allowed to be capitalised.
The objects of the assessee-society have been specified in its bye-laws. The main object of the society is to set up a sugar factory as has been specified in cl. (a) of the “objects”. In cl. (b), special emphasis was made by Sh. Mukhi on clauses (ii) and (vii), which read as under : “(ii) To raise loan from Industrial Finance Corporation/Industrial Development Bank for investment in block assets and allied purposes. (vii) To undertake measures for development of sugarcane including supply of seed, manure, implements, irrigation and other production requisites provision of technical advice regarding improved cultivation practices.”
The assessee-company had raised loans from various sources and certain measures for the development of sugarcane had also been under taken. Since these activities have been specified in the bye-laws under the head “objects”, the raising of loans and the purchase of machine by opening a letter of credit should be treated to be activities towards the objects of the society.
The argument put forward by Shri Mukhi has no substance. The CIT as well as the Tribunal have given a finding of fact that the business of the assessee had not commenced. The assessee had raised share capital and also loans, so as to set up the sugar factory. Therefore, these two activities were simply ancillary to the commencement of business and could not be said to be the main business. The assessee did not raise loans or deposit money in the bank as part of its business activities inasmuch as money lending activity was not the assesseeâs business. In view of the finding given by the Tribunal that the assesseeâs business had not yet commenced, the first plea raised by Shri Mukhi, learned counsel for the assessee is liable to be rejected. It is, therefore, found that the business of the assessee had not commenced and it was only the pre-operative stage during which moneys were deposited with the bank and certain expenditure was incurred.
The second argument by way of alternative plea raised on behalf of the assessee is that the assessee had earned interest from such deposits which were made out of business necessity. The supplier had required the assessee- company to open a letter of credit with the bank, so that machine could be supplied. Therefore, the assessee had to pay money in the fixed deposit so as to open a letter of credit. The assessee had debited various expenses to the profit and loss account and credited the interest income to that account to reduce the losses. The balance loss as emerged from the profit and loss account was capitalised and thereby the cost of the assets increased. It is, therefore, to be seen as to what was the object for making fixed deposits in the bank. It was, as observed earlier, not a business income, when interest was earned from the fixed deposits. If the interest income was not business income, it should either be treated as “income from other sources” under s. 56 of the Act or as money received for reducing the cost of the capital assets.
Shri Mukhi, learned counsel for the assessee has placed reliance on a decision of the Delhi High Court in CIT vs. State Trading Corporation of India Ltd. (1973) 92 ITR 294 (Del) : TC 13R.669. That was a case where certain grant-in-aid was received from the Government of India prior to the commencement of the business. It was held that the money received by way of grant-in aid was not a business income nor a business receipt but it was a receipt of a casual and non-recurring nature. The nature of income was, therefore, basically different in the hands of the assessee in that case and, therefore, the decision of the Delhi High Court is found to be not relevant to the facts of the case in hand.
In Addl. CIT vs. Indian Drugs & Pharmaceuticals Ltd. (1983) 141 ITR 134 (Del) : TC 13R.668, the Delhi High Court had again an occasion to examine a question relating to certain receipts. In that case also, the business had not been set up and none of the units of the assessee had commenced production. The assessee had received a sum of Rs. 40,540 by the supply of tender forms regarding construction and erection of plant. A sum of Rs. 28,241 was received from the sale of grass, trees, etc., and another sum of Rs. 17,818 from the sale of stones and boulders. Another sum of Rs. 76,201 was realised by supplying water and electricity to the contractors constructing the factory. The AO took the view that the sums of Rs. 40,540, Rs. 28,241 and Rs. 17,818 were the assesseeâs income assessable under the head “Income from other sources”. The ITO also estimated a profit of 10 per cent on the sale price of water and electricity, thereby bringing a sum of Rs. 7,520 as income from other sources. In appeal, the receipts were treated to form part of the capital assets of the assessee and not arising while carrying on any business in timber. On further appeal, the Tribunal held that the receipts on account of sale of tender forms and on account of realisation from electricity and water charges from contractors would go to reduce the cost of construction and were not revenue receipts. The Tribunalâs view was affirmed by the High Court. It was observed by the Court that the receipts were from sources which were not independent, but which were inextricably linked with the process of setting up the business. The activity was a part and parcel of the constructional activities of the assessee. Since the business had not been fully set up, the receipts were capital in nature and did not constitute income liable to tax.
The Bombay High Court had also an occasion to examine a question relating to the interest on short-term deposits in CIT vs. Maharashtra Electrosmelt Ltd. (1995) 124 CTR (Bom) 117 : (1995) 214 ITR 489 (Bom) : TC 41R.557. In that case, the assessee-company was incorporated for doing business as a manufacturer of ferro-manganese. During the year under consideration, the assessee was engaged in the erection of a smelter for the purpose of manufacturing ferro-manganese. The commercial production had not started. The total expenses incurred during the year amounted to Rs. 83,32,473. The assessee had realised a sum of Rs. 3,14,356 as interest on short-term deposits of the funds not immediately required by the assessee. At the same time, the assessee had paid a sum of Rs. 58,51,505 as interest on funds borrowed for the purpose of its business. A sum of Rs. 2,742 had been received from the sale of empty gunny bags. Out of the total expenses of Rs. 83,32,473 incurred during the year, the assessee treated a sum of Rs. 1,04,190 as an item which could not be capitalised. Out of the balance amount of Rs. 82,28,283, the assessee deducted the two items of income, namely, interest and miscellaneous income, amounting in all to Rs. 3,17,108 and capitalised the balance of Rs. 79,11,175. The ITO took the view that the two items of income, amounting to Rs. 3,17,108, were assessable under the head “Income from other sources”. However, the CIT agreed with the contention of the assessee in appeal and took the view that the income arose in the course of business carried by the assessee and not from any separate source of income. The CIT, therefore, accepted the adjustment as made by the assessee in its account. The Tribunal also upheld the decision of the CIT, after noticing that the treatment given by the assessee to the said two items of income was in accordance with the principles laid down by the Institute of Chartered Accountants of India, which was a recognised authority on accounting principles. The view taken by the Tribunal was affirmed by the High Court and it was held that the whole arrangement of obtaining the finance and its temporary utilisation formed one composite transaction and, as such, the interest received by the assessee on account of temporary utilisation of the loans could not be considered in isolation. Therefore, the income derived by the assessee could not be assessed as income from other sources.
A question arose before the Supreme Court as to whether underwriting commission received by the assessee should be taken to the profit and loss account or should be adjusted to reduce the cost of shares in CIT vs. U.P. State Industrial Development Corporation (1997) 139 CTR (SC) 267 : (1997) 225 ITR 703 (SC). The assessee was a State undertaking and its shares were wholly subscribed by the State of Uttar Pradesh. It had been incorporated with the object of developing industries in the State of Uttar Pradesh. One of the clauses for financing the companies by the assessee was that on the shares of such companies subscribed by the public, the assessee was entitled to get commission as well as brokerage on the sale of shares of such companies. In case the shares of such companies were not subscribed by the public in toto, the assessee was obliged to subscribe those shares at face value and was entitled to underwriting commission and brokerage in the same manner as if the shares of such companies were subscribed by the public. The method adopted by the company was that, instead of crediting the underwriting commission and brokerage to its profit and loss account., it used to reduce the cost of shares held by it as stock-in-trade. The assessee had earned by way of underwriting commission a sum of Rs. 1,01,250 and brokerage to the extent of Rs. 33,719. The assessee had offered a sum of Rs. 12,535 out of the aforesaid receipts as its taxable income. In the next year, the assessee again earned by way of underwriting commission and brokerage aum of Rs. 1,15,000 and no part of it was included in its taxable income. The ITO added the entire amount received by the assessee by way of underwriting commission and brokerage as part of the taxable income for both the assessment years. In appeal, the AAC held that the underwriting commission was assessable as income but brokerage received by the assessee was not includible in the income and had to be adjusted against the cost of the shares taken. In further appeal, the Tribunal held that the underwriting commission in respect of the shares held by the assessee could reduce the cost of the shares and could not be separately assessed as the assesseeâs income. The Revenue had not questioned the order of the AAC regarding brokerage and, thus, brokerage was also adjusted against the cost of the shares. The Supreme Court took notice of the observations made by the Tribunal on the principles of accountancy and upheld the view taken by the Tribunal. It was noticed that the commission earned by the assessee as underwriter in respect of the shares offered by the company and purchased by the public would undoubtedly be the profit of the assessee to be accounted for in its profit and loss account. However, the amount of underwriting commission and brokerage received by the assessee on the shares purchased by it would go to reduce the value of the shares and could not be considered as the income of the asses
Shri R.P. Sawhney, learned senior counsel for the Department, has argued that the income earned by the assessee by way of interest was in the nature of income from other sources and could not go to reduce the cost of the asset. So far as expenditures are concerned, those have been capitalised by the assessee and rightly so. It is pointed out that the assessee had deposited money with the bank out of its share capital and not from the borrowed funds. It is a finding of fact given by the Tribunal that money had been deposited out of the share capital. It is, therefore, argued by Shri Sawhney that whatever interest income was earned, that was out of the unutilised share capital money deposited with the bank. In the absence of any material on record showing that deposits had been made out of the borrowed money, there was no justification to draw a presumption that interest income was required to be adjusted against the amount of interest paid by the assessee on the borrowings. Moreover, no expenditure has been specified by the assessee which had been incurred for the purposes of earning the interest income. Reliance has been placed by Shri Sawhney on various decisions of the High Court, which shall be discussed hereinafter. It has been emphasised by Shri Sawhney that whenever surplus money lying with the assessee is deposited with the bank and certain interest is earned, that could not go to reduce the cost of the assets acquired inasmuch as the purchase of assets and the deposit of the surplus money did not have any nexus or link between them. If the surplus money is deposited because it is not being utilised for the purposes of business for the time being, any interest income earned from the deposits shall be treated to be income and it will not be taken to the capital account of the assets.
In Madhya Pradesh State Industries Corporation Ltd. vs. CIT (1968) 69 ITR 824 (MP) :TC 41R.520, the assessee had received the share money. During the year under consideration, the assessee did not carry on any business nor was there any production. Since, the share money was not immediately required, it was deposited in call-deposits in the banks. The assessee received interest on the deposits. It was held that the deposit of share capital in the bank was not an act of moneylending and interest income was assessable as income from other sources under s. 56 of the Act and not as business income under s. 28 of the Act.
The Kerala High Court has also taken a similar view on the question of interest income earned from certain deposits in Traco Cable Co. Ltd. vs. CIT (1969) 72 ITR 503 (Ker) : TC 41R.529. The company had deposited in the banks the share capital collected by it and earned interest on those deposits. Certain expenditures were also incurred by way of salary and wages, printing, stationery and other expenses. It was held that the amount received as interest was income from other sources and the expenditure was not allowable deduction under s. 57 of the Act.
In CIT vs. New Central Jute Mills Co. Ltd. (1979) 118 ITR 1005 (Cal) : TC 17R.701, the Calcutta High Court has also held that interest earned on certain deposits kept with the bank was assessable under the head “Other sources”. The assessee had obtained from the Government a certain loan for the purpose of setting up of the plant. The amount received under the loan had been kept in deposit with the bank pursuant to the terms of agreement. The assessee had also paid to the Government a certain amount as interest. The difference between the interest earned and the interest paid was claimed by the assessee as revenue expenditure. The ITO disallowed the claim on the ground that the expenditure had nothing to do with the existing business of the assessee and related to a separate unit which was still under erection. It was found that the specifically ear-marked loan had been utilised for the purchase of machinery and that the payment was in the nature of capital expenditure. It was noticed that the assessee had not established that the expenditure was incurred solely and wholly for the purpose of earning interesrom the bank. The interest paid to the Government was allowed to be capitalised and added to the cost of the plant.
The Andhra Pradesh High Court in CIT vs. Derco Cooling Coils Ltd. (1992) 104 CTR (AP) 755 : (1992) 198 ITR 375 (AP) : TC 41R.562, has also treated the interest income earned by a company which had not yet gone into production as income from other sources. The assessee had earned interest on the share capital received from the public, which was kept in fixed deposits with banks. The assessee had also paid interest on the borrowed funds. The ITO held that the receipt of interest was taxable as interest from other sources and the amount of expenditure related to the term “loans” used for construction and setting up of the plants. The receipt arose out of share capital deposited with the bank, which might or might not be utilised for the purpose of setting up of the plant. Deduction of expenditure could be claimed only if it was expended wholly and exclusively for the purpose of making or earning the income from other sources. Therefore, income earned by way of interest was held to be assessable under the head “Income from other sources” under s. 56 of the Act.
The Patna High Court in CIT vs. Bihar Alloy Steels Ltd. (1994) 116 CTR (Pat) 346 : (1994) 206 ITR 350 (Pat), has also taken the view that the principles of commercial accounting cannot determine or affect the range of taxable income or ambit of taxation because the tax liability under the Act is to be governed by the provisions of the Act, and not by the principles laid down for maintaining the accounts. In that case, the assessee carried on business as iron founders and offered its shares for subscription by the public, which were over-subscribed. The money so received in excess was deposited by the assessee with banks on short-term deposits. The assessee received certain amount as interest on those deposits. This interest was adjusted by the assessee against the expenditure on capital work-in-progress. The assessee also claimed deduction of expenditure for earning the said interest income. The ITO rejected the claim on the ground that the assessee had not commenced its business. The High Court took the view that the amount on which the bank interest was earned had absolutely no connection with the amounts, which were borrowed and spent on construction. Interest on short-term deposits was held to be assessable as income from other sources. Interest paid on the amounts borrowed by the assessee for acquisition and installation of plant before the commencement of production was treated to be as part of the “actual cost” of the asset. Such interest was not allowed as deduction in computing the income of the assessee.
The Delhi High Court in CIT vs. Modi Rubber Ltd. (1994) 120 CTR (Del) 74 : (1994) 208 ITR 379 (Del) : TC
41R.571, has also taken a view that the interest on deposits cannot be capitalised and is taxable as income from other sources. There also, the assessee was in the process of setting up its factory and had not come into business. The share capital was invested in the fixed deposits in the banks to earn income. The interest income so earned was not related to the activity of the assessee of construction of the factory as such. It was observed that the activity of depositing the surplus funds out of the share capital could not be said to be incidental to the construction of the factory. Interest income from the bank deposits accrued or arose out of an independent source during a period when the business had neither been set up nor commenced. Interest income was, therefore, held to be assessable to tax under the head “Income from other sources”.
The Rajasthan High Court has also treated interest earned on deposits, to be assessable as income from other sources in two cases, namely : (i) CIT vs. Rajasthan Land Development Corporation (1995) 125 CTR (Raj) 261 : (1995) 211 ITR 597 (Raj) : TC 41R.545 and (ii) CIT vs. Manglam Cement Ltd. (1996) 217 ITR 369 (Raj) : TC 41R.524. It was observed that, if there was no nexus between the receipt of interest on short-term deposits and the payment of interest on loans borrowed for capital expenditure, the expenditure laid out by the assessee could not be deducted from the interest income under s. 57(iii) of the Act. In both the cases, the assessee had deposited the surplus money which was not required for the business. The idle money was deposited in the banks and interest was earned.
In the case of the assessee before us, it has already been seen that money was deposited, to open a letter of credit under the terms of the agreement with the supplier of the machine. It was, therefore, not a case where surplus share capital money lying idle and unused had been deposited in the bank. Here the money was deposited out of necessity for the purpose of acquiring an asset. The plea of the Department that unutilised and surplus money had been deposited by the assessee, does not appear to be correct. The assesseeâs plea that money had been deposited so as to open a letter of credit has not been controverted. Therefore, the activity of depositing money out of the share capital was an activity incidental to the acquisition of the asset. It was not a case where surplus share capital money was deposited with the bank because it was lying unutilised and idle. The assessee deposited the money with the bank with a definite purpose to execute an agreement for the purpose of acquiring the machine. There is, however, no evidence on record to show that the fixed deposit has been made by the assessee out of the borrowings. It was the share capital which was deposited. The question, therefore, arises as to whether the deposit of the share capital money was made because the assessee did not for the time being, require the money for its business. The assessee purchased fixed deposits in the course of an activity directly relatable to the acquisition of an asset. There is, thus, a direct nexus between the purchase of the machinery and the deposit of money in the bank. This nexus shall bring about a presumption in the assesseeâs favour that the money was deposited not without a purpose but with the object of acquiring a machine from the supplier. Such interest income being directly relatable to the terms of the contract for acquiring a business asset should go to reduce the cost of the asset. As has been seen, the Supreme Court in CIT vs. U.P. State Industrial Development Corporation (supra) took notice of the activity of underwriting shares and the earning of the underwriting commission and brokerage from such activity. It was held that as the underwriting commission had been earned by the assessee in the course of taking over certain shares, such commission shall go to reduce the cost of the shares acquired by the assessee and could not be taken into the profit and loss account. Since, the assessee had subscribed certain shares out of the underwritten shares, the commission relating to those shares went towards the cost and no income was earned by the underwriter. Following the ratio laid down by the Supreme Court in CIT vs. U.P. State Industrial Development Corporation (supra), it has to be concluded, in the present case, that the interest income earned by the assessee was directly relatable to the activity of acquiring an asset from a supplier in whose favour a letter of credit was opened after paying money in fixed deposits. Since, the two activities, namely, deposits made in the bank and the acquisition of machinery have a direct nexus, the interest income has to be associated with the cost of the asset so acquired. It was not a case of deposit of surplus money, entirely unconnected with any other activity of the assessee. The deposit of share capital money with the bank had a definite purpose and object. In this light, the interest earned by the assessee shall go to reduce the cost of the asset acquired out of the transaction.
In the result, questions Nos. 1 and 2 are answered in the negative, i.e., in favour of the assessee and against the
Question No. 3 :
The assessee has claimed certain deductions from the interest income with the plea that expenditure incurred for the purpose of opening a letter of credit and also on the payment of interest on account of the over draft account should be deducted from the interest income. This question has, therefore, become academic in view of the opinion given in respect of questions Nos. 1 and 2. However, the question is being examined so that the interpretation with regard to deductibility of expenditure is settled.
Shri Mukhi, learned counsel for the assessee, has argued that letter of credit charges paid by the assessee in each of the two years under assessment should be adjusted against the interest income, if such income is held to be assessable as income from other sources.
Shri R. Sawhney, learned senior counsel for the Department, has, on the other hand, contended that an expenditure, which is wholly and exclusively incurred for the purposes of earning an income, can be deducted and not any other expenditure.
The Kerala High Court in Traco Cable Co. Ltd. vs. CIT (supra), has taken the view that an expenditure incurred by an assessee can be allowed as a deduction only if it is incurred for the purpose of earning the interest. Office and establishment expenses, unconnected with the earning of the income, were not permissible deduction under s. 57 of the Act. A similar view has been taken by the Calcutta High Court in CIT vs. New Central Jute Mills Co. Ltd. (supra) and also by the Andhra Pradesh High Court in CIT vs. Derco Cooling Coils Ltd. (supra). It has been held that the amount of expenditure can be deducted from the income, only if it is expended wholly and exclusively for the purpose of earning the income from other sources. A similar view has been taken by the Patna High Court as well as the Rajasthan High Court in CIT vs. Bihar Alloy Steels Ltd. (supra) and CIT vs. Manglam Cement Ltd. (supra), respectively
The Karnataka High Court in Karnataka Forest Plantations Corporation Limited vs. CIT (1986) 53 CTR (Kar) 308 : (1985) 156 ITR 275 (Kar) : TC 41R.742, has also examined the question of deductibility of expenditure from the interest income. It was held that interest payable on the borrowings was not deductible under s. 57(iii) of the Act, because borrowings were not made to make investments and earn interest from them. The Gauhati High Court has also taken a similar view in CIT vs. Assam Plantation Crops Development Corporation Ltd. (1996) 136 CTR (Gau) 271 : (1996) 221 ITR 392 (Gau). It has been observed that deduction was permissible from income under s. 57 of the Act only if it was incurred wholly and exclusively for earning the interest income.
The Supreme Court has, in Challapalli Sugars Ltd. vs. CIT 1974 CTR (SC) 309 : (1975) 98 ITR 167 (SC) : TC 17R.834, laid down that interest paid before the commencement of production on the amounts borrowed for the acquisition and installation of plant forms part of the “actual cost” of the assets. The assessee will be entitled to depreciation allowances and development rebate with reference to such interest also. It was observed that the accepted accountancy rule for determining the cost of fixed assets is to include all expenditures necessary to bring such assets into existence and to put them in working condition.
In the case of the present assessee, interest income has been held to be capitalised, so as to reduce the cost of the asset. Therefore, there is no question of deducting any expenditure from the interest income inasmuch as it is not being treated as income from other sources. The deductions claimed have already been capitalised.
The expenditures incurred by way of “letter of credit charges” and interest paid on the overdraft account are not eligible for deduction under s. 57 of the Act inasmuch as, it has not been established that these expenditures have been incurred by the assessee, so as to earn the interest. “Letter of credit charges” were paid to the bank for opening a letter of credit during the course of acquiring an asset from a supplier. Therefore, these charges were not paid, so as to earn interest on the fixed deposits. Similarly, interest paid on the overdraft money in the bank account is also not connected with the fixed deposits credited by the assessee for opening a letter of credit. As has already been seen, deposits had been made out of the share capital money. Therefore, interest paid on the borrowings shall not go to reduce the interest income. Question No. 3 is, therefore, answered in the affirmative, i.e., against the assessee and in favour of the Department.
Question No. 4 :
The assessee had claimed deduction of Rs. 20,000 under s. 80P(2)(c) of the Act. In appeal, deduction of Rs. 20,000 allowed by the AO in each of the two years was withdrawn. The CIT took the view that the assessee was not entitled to claim deduction of Rs. 20,000 in any of the two years inasmuch as the society was not engaged in its main activity. The production had not yet started and, therefore, the main activity of the society had not yet commenced. Clause (c) of subs. (2) of s. 80P permitted a lump sum deduction of Rs. 20,000, where a co-operative society earned profits attributable to its activities.
It has already been seen that the society had not yet commenced production and, therefore, whatever activities had been undertaken, those were pre-operative activities. In this view of the matter, the application of cl. (c) was found wholly inappropriate by the CIT as well as the Tribunal. If the income is earned out of an activity of the society, then a deduction of Rs. 20,000 is admissible under sub-cl. (ii) of cl. (c). The assessee had not yet commenced business or production of sugar and, therefore, the pre-operative activity could not make it eligible to claim deduction under sub-cl. (ii) of cl. (c) of sub-s. (2) of s. 80P of the Act.
Shri Mukhi, learned counsel for the assessee, has placed reliance on a decision of the Supreme Court in Broach Distt. Co-operative Cotton Sales, Ginning & Pressing Society Ltd. vs. CIT (1989) 77 CTR (SC) 70 : (1989) 177 ITR 418 (SC) : TC 26R.657. That was a case where exemption has been sought under s. 81(1)(c) of the Act. That decision is, therefore, distinguishable on facts and is not applicable to the controversy arising here. In the result, the withdrawal of deduction by the Commissioner and the Tribunal is upheld. The assessee is held to be not entitled to the deduction under s. 80P(2)(c) of the Act.
Question No. 4 is thus, answered in the affirmative, i.e., against the assessee and in favour of the Department.
[Citation : 233 ITR 531]