V.K. Singhal, J. - (1.)ON the request of the Revenue, the following two questions of law arising out of the order of the Income-tax Appellate Tribunal, Jaipur, dated May 7, 1985, have been referred under Section 256(1) of the Act in respect of the assessment year 1979-80 :
"1. Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was justified in holding that interest received of Rs. 2,58,089 on short-term deposits with banks was not taxable under Section 56 of the Income-tax Act, 1961 ?

(2.)WHETHER, on the facts and in the circumstances of the case, the Appellate Tribunal was justified in holding that interest received of Rs. 2,58,089 on short-term deposits with banks was to be reduced from the interest payments while capitalising the various expenditure to capital account ?"
2. The facts of the case are that the assessee is a limited company and was incorporated on October 27, 1976. The certificate of commencement of business was issued by the Registrar of Companies on January 19, 1977, and the company was granted the consent by the Controller of Capital Issues on July 27, 1978. The prospectus for the raising of capital from the public was issued on November 18, 1977. The loans were obtained from the financial institutions as well as from other parties for the purchase of capital equipment and for setting up the business of the company, which was manufacturing cement. The company has paid interest on all its borrowings. Besides the loan, the company has also received the application money for issue of share certificates and the application money so received was deposited with the bank as short-term deposit besides part of the borrowings. On such deposit, the company earned an interest of Rs. 2,58,089. On the other hand, the amount of interest paid by the company on its borrowings was Rs. 14,32,072. The amount of Rs. 2,58,089 was deducted from the interest paid and the balance amount of interest was treated as part of the capital cost of the building, plant and machinery, etc. The submission of the assessee was that since construction activities were going on, all the expenditure and receipt of money go either to increase the cost of the capital assets or reduce them and as such the interest received should be adjusted from the interest paid. The Income-tax Officer held that the interest income earned by the assessee on deposits with the bank has nothing to do with the construction activities and as such is taxable income from other sources under Section 56. The contention of the assessee that the interest amount paid should be set off against the income earned, was also negatived by the Income-tax Officer on the ground that Section 57 of the Act permits the deduction only of such expenditure which has been incurred by the assessee in earning the interest. Since the borrowings by the company were for the purpose of construction and bas no relation with the earnings of interest with the deposit, the Income-tax Officer was of the view that the interest paid cannot be deducted under Section 57. However, a sum of Rs. 10,000 was allowed which was considered as relatable to the earning of the income of interest as there were certain administrative expenses incurred by the company.

The appeal before the Commissioner of Income-tax (Appeals) was rejected and the order of the assessing authority was confirmed. In the second appeal, before the Income-tax Appellate Tribunal, again the contention was raised that till the construction is complete, the entire activities of the company are centred on construction alone and, therefore, the interest paid or received goes to increase the cost of capital assets or reduce it and, therefore, that cannot be taxed as income "from other sources".

The submission of Mr. Bapna, on behalf of the Revenue, is that the deduction which has been provided under Section 57 could alone be allowed in respect of an income which is "from other sources". Since the payment of interest in respect of the capital expenditure is not an allowable deduction, therefore, the interest received on short-term deposit cannot be allowed as a deduction and is taxable under Section 56 of the Act.

Mr. Ranka, learned counsel for the respondent, submitted that the Orissa High Court, in the case of CIT v. Electrochem Orissa Ltd. [1995] 211 ITR 552, has considered this matter and has not agreed with the view taken by the Madras High Court in the cases of CIT v. Tamil Nadu Industrial Development Corporation Ltd. [1991] 189 ITR 670 and CIT v. Seshasayee Paper and Boards Ltd. [1985] 156 ITR 542 in which the Madras High Court has taken the view that unless the assessee had established its factory, there would be no question of computing its business income during the year and the interest earned by the assessee could be assessed separately under the head "Other sources". The decision of the Andhra Pradesh High Court in the case of CIT v. Nagarjuna Steels Ltd. [1988] 171 ITR 663 was taken into consideration where the surplus fund was kept on short-term deposits and the interest so earned was considered to be set off against the interest paid by the assessee on the loans obtained and the balance interest was considered to be capitalised. The interest received on the short-term deposit was held not assessable as revenue receipt. The view taken by the Andhra Pradesh High Court was followed by the Orissa High Court in this case.

We have considered over the matter. The provisions of Section 56 provide that income of every kind, which is not to be excluded from the total income under this Act shall be chargeable to income-tax under the head "Income from other sources", if it is not chargeable to income-tax under any of the heads specified in Section 14, items (A) to (E). Section 32 provides depreciation in respect of buildings, machinery, plant or furniture owned by the assessee and used for the purposes of the business or profession on actual cost. The words "actual cost" were interpreted by the apex court in the case of Challapalli Sugars Ltd. v. CIT [1975] 98 ITR 167 and it was interpreted that the expression "actual cost" should be construed in a commercial sense and in accordance with the normal rules of accountancy, it includes all expenditure necessary to bring the assets into existence and put them in working condition. The interest paid on borrowed money was considered as part of the cost of plant and machinery. Section 14 provides for the computation of total income in different heads. The "income from other sources" has been separately given from the profits and gains of business or profession. The charge has been created by Section 4 in respect of the total income of the previous year.

(3.)THE Delhi High Court in the case of CIT v. Modi Rubber Ltd. [1994] 208 ITR 379 has considered a case where the business was not commenced and the money which was received from the shareholders towards share capital was deposited in the bank. THE interest on deposits so earned was not considered as incidental to the business and was not related to the activity of construction of the factory, and as such was considered as not part of the cost of construction of the factory. THE interest from bank deposit was considered to have arisen out of an independent source when the business had neither been set up nor commenced.
In Madhya Pradesh State Industries Corporation Ltd. v. CIT [1968] 69 ITR 824, the Madhya Pradesh High Court observed that where the share money received by the company which was not immediately required and was deposited in certain banks as call deposits, the deposit of share capital in the bank was not considered to be an act of money-lending business and was considered as "income from other sources" and liable to be considered under Section 56 of the Act.

In Nalinikant Ambalal Mody v. S.A.L. Narayan Row, CIT [1966] 61 ITR 428, it was observed by the apex court that whether an income falls under one head or the other, had to be decided in accordance with the notions of practical men and the question under which head an income comes cannot depend on when it was received. The provisions of Section 14 make it clear that all the different sources of income which have been treated under the Act separately and when the income from interest received on short-term deposit falls under the head "Income from other sources" then it has to be treated separately under such head.