V.K. Singhal, J. - (1.)THE Income-tax Appellate Tribunal has referred the following questions of law arising out of the order of the Tribunal dated March 20, 1986, in respect of the assessment year 1983-84 under Section 256(1) of the Income-tax Act, 1961 :
"1. Whether the Tribunal was right in law in treating interest as income and as income from other sources ?

(2.)WHETHER the Tribunal was right in law in not reducing interest in capital expenditure ?
Whether the Tribunal was right in law in treating entire gross receipts of interest at Rs. 20,785 as income and in not allowing expenses claimed by the assessee from the said income ?"

2. The facts of the case are that the assessee is a limited company with its registered office at Jaipur. The company was incorporated on October 1, 1981. The company carried on the activity of construction of its factory building and all its activity was done in the year, as pre-production and the commercial production was not started at all. The profit and loss account was prepared and interest of Rs. 20,785 earned on the deposits with the bank which was considered as not earned on the ground that it is to be reduced from the pre-operative expenditure. In an appeal before the Commissioner of Income-tax (Appeals), the appellate authority observed that the interest income would be carried over and allowed to be reduced from the capital cost of the assets. The alternative contention that if it is treated as income then proportionate administrative expenses which were incurred as pre-operative expenses should be allowed as a deduction from the interest income was not considered by the Commissioner of Income-tax (Appeals). The matter was challenged by the Revenue before the Tribunal and it was observed that the interest income was rightly taxable as income from other sources. The alternative contention was also considered and it was observed that :

"As regards the claim of expenditure, the details of the expenditure as have been submitted before the Commissioner of Income-tax (Appeals) indicate that of the total amount of Rs. 23,472, Rs. 13,000 is on project report expenses, which are covered under Section 35D and the other expenses like travelling, stationery, salary to staff, etc., are in the nature of pre-operative expenses and since the construction having not been completed, they have to be carried forward to be capitalised or allocated to the various assets, even the claim under Section 35D can be allowed only from the year in which the business commences. In the year, the business has not commenced and, therefore, the claim of the assessee cannot be entertained."

3. We have considered over the matter. It is an admitted position that the business activity was not carried on by the assessee and, therefore, the interest received has to be treated as income from other sources. The said amount cannot be allowed to be reduced from computing expenditure. The expenditure which were claimed by the assessee were considered by the Tribunal as covered by Section 35D and, therefore, the income of interest could not be adjusted from the expenses for which specific provision has been made. The matter stands concluded by the decision of this court in the case of CIT v. Rajasthan Land Development Corporation [1995] 211 ITR 597 and CIT v. Manglam Cement Ltd. [1996] 217 ITR 369 (D. B. Income-tax Reference No. 58 of 1986 decided on March 22, 1995). Under Section 57 certain expenditure has been allowed and when specific provision has been made under Section 35D, expenses cannot be claimed under any other section.

We are, therefore, of the opinion that the Tribunal was right in treating the interest income as "income from other sources". The Tribunal was further right in not reducing the interest from capital expenditure. The expenditure claimed by the assessee was duly allowable under Section 35D and, therefore, could not be adjusted from the income by way of interest received during the year under consideration.

Consequently, the reference is answered in favour of the Revenue and against the assessee. No order as to costs.