1. At the instance of the Revenue, the Income-tax Appellate Tribunal has referred the following question to this court for its opinion :
'Whether, on the facts and in the circumstances of the case, the Appellate Tribunal is correct in law in holding that the interest eared by the assessee on investment of share capital in call deposits could not be assessed separately under the head 'Other sources' for the assessment year 1962-63 ?'
2. The assessee is a public limited company and for the assessment year 1962-63, the Income-tax Officer found that the paid-up share capital to the extent of Rs. 3,49,26,673 as on March 31, 1962, secured loan of Rs. 50,00,000 from the Industrial Credit and Investment Corporation of India Ltd. and unsecured loan of Rs. 2,00,00,000 from the Export and Import Bank, Washington, which had been drawn fully in the previous year, were all invested in banks on call deposits and the assessee had received the following interest in the previous year :
Rs.1. Interest which accrued during the yearon call deposits (as per particulars furnished) 1,91,1252. Interest on current account 8393. Interest on fixed deposit 374. Interest refund on excess paid on letter of credit 5305. Interest on call money due 6,298-----------1,98,829-----------
He also found that the assessee had debited during the previous year a sum of Rs. 4,56,232.96 being the interest due to the Export and Import Bank, Washington, and the Industrial Credit and Investment Corporation of India Ltd. However, no portion of the interest receipt of Rs. 1,98,829 the details of which have been sty out above, was offered for assessment on the ground that substantial funds had been borrowed during the accounting period for construction, that the funds which were not immediately required during the period of construction were invested on call deposits which yielded interest to the aggregate of Rs. 1,91,125, that in such cases, it will not be possible or correct to split the interest into two items, namely, interest earned on investment of share capital and investment of borrowed funds, and that so long as the interest paid during the construction stage exceeded the interest received during the year, there was no interest income liable to be assessed. The Income-tax Officer held that the interest earned by the assessee on investment of borrowed money on call deposits was not liable to tax as the interest received was less than the interest paid. However, he took the view that as regards the interest earned on call deposits of share capital, the same was liable to tax under the head 'Other sources'. He, therefore, assessed a sum of Rs. 1,18,972 being the interest received from June 5, 1961, to August 29, 1961, on call deposits made out of the paid-up share capital. As regards interest received during the period from October 30, 1961, to March 31, 1961, the Income-tax Officer was of the view that this related to investment of both paid-up share capital and borrowed amounts and, therefore, it was not possible to correctly determine the portion of the interest earned on the investment of the paid-up share capital. On a rough and ready basis, the interest on investment of paid-up capital was estimated at Rs. 42,000 to be charged under the head 'Other sources'. Thus, the total interest assessed came to Rs. 1,60,972.
3. Aggrieved against the order of the Income-tax Officer, the assessee went on appeal before the Appellate Assistant Commissioner. The Appellate Assistant Commissioner held that the entire interest income irrespective of its origin has to be assessed only under the head 'Other sources' and directed the Income-tax Officer to ascertain the amount of interest earned by the assessee during the year from the paid-up capital as well as borrowed capital, which the assessee had obtained by way of loans from the Industrial Credit and Investment Corporation and the Export and Import Bank of Washington and tax the entire interest under the head 'Other sources'. In the appellate order, the appellate authority also directed that expenses at 5% of the interest or actual expenses, whichever is lower, may be allowed and all interest outgoings were to be capitalised subject to the assessee's entitlement for relief on the basis of such capitalisation. The assessee went before the Tribunal on this issue as well as on certain other issues. On this issue, the Tribunal, after considering the real impact of the interest earned by the assessee, had held that the proper mode of assessment in this case with regard to the interest earned both on its own funds as well as on borrowed funds would be to set off against the interest payments and the net result has to be directly taken to the cost of construction of its factory and capitalised.
4. According to the Tribunal, when a company employing its own as well as borrowed funds by investing them in various deposits earns interest, it should be taken that it is done for two purposes, viz., (1) instead of keeping the funds idle, they want to make them productive; and (2) to reduce their capital investment by way of earning interest on the amount which is not immediately needed for the construction, and in this case, as business had not been started, and they were in the pre-production stage, any earning of income should be viewed from the point of view or reduction in the commitments, and it is well-settled that all interest payments incurred during the pre-commencement period would go to increase the cost of construction and will have to be capitalised and, therefore, any interest earned during the period irrespective of whether it was out of own funds or borrowed funds, will have to be judged from the point of view of the total outlay in the construction and the setting up of the factory, and, as such, it was justifiable for the assessee to claim set off of the entire interest as attributable to its project cost getting reduced.
5. Aggrieved by the said decision of the Tribunal, the Revenue has come before us by way of this reference. From what has been stated above, it is seen that the three authorities below have taken three different views. The Income-tax Officer has taken the view that the interest income by investment of paid-up capital alone will have to be assessed as income from 'Other sources'. The Appellate Assistant Commissioner has taken the view that the entire interest income both not the share capital as well as on the borrowed funds has to be assessed under the head 'Other sources' and that the assessee will be entitled to capitalise all his interest payments. The Tribunal has taken the view that the difference between the interest paid on the borrowings and invested, including the paid-up share capital, can be capitalised and that the interest income on all investments including that of the paid-up share capital cannot be assessed in the assessee's hands under the relevant head 'Other sources'. In his book The Law of Income-tax, XI Edition, Volume 1, at page 331, the author, V. S. Sundaram, has pointed out that the word 'income' is of a very elastic ambit, that whatever comes in, whether revenue or capital, from an outside source has to be treated as income and that the 'income' can either be positive or negative and that both positive and negative profits must enter into computation. Kanga and Palkhivala, in Volume I of their Treatise on The Law and Practice of Income-tax, at page 340, have pointed out that the charge is not on gross receipts but on profits and gains properly so called. The same authors have pointed out at page 616 of the same book that though income has been classified under section 14 under six heads of income, income-tax is levied on the sum total of the income classified under various heads and that it is not the collection of disting taxes levied separately on each head of income, that under the Income-tax Act, income and not several incomes is taxed and that, on that basis, the loss sustained in any year under one head is to be allowed a set-off against income under another head in that year in order to arrive at the true total income of the assessee. According to the learned counsel for the Revenue, the interest income earned both from the investment of paid-up share capital as also from the borrowed funds should be taken to be the assessee's income under the head 'Other sources' for the assessment year in question, and so long as there is no business income to be assessed as the factory itself was under construction, the said receipts cannot be adjusted against the interest paid on the borrowings. As the borrowings have been made for the purpose of construction, the interest paid on the borrowings has naturally to be capitalised. In support of the said plea, reference has been made to the following decisions. Traco Cable Company Ltd. v. CIT : 72ITR503(Ker) was a case where the share capital of a company had been invested in banks pending commencement of business. A question arose as to whether the interest received from banks was income from business and whether the office expenses before the commencement of the business is an allowable deduction from the interest income. The Kerala High Court held that clause (v) of article 3 of the memorandum of association only empowered the company to invest and deal with the funds of the company not immediately required, that all that the company did was to deposit in banks, the share capital received instead of keeping it in its own safe, that this was done because the company had not commenced business, and the amounts were not immediately required for any business and that the receipt of income by interest was only incidental or consequential on the deposit as the deposit of the share capital by the company was not a business carried on by the company, that the expenditure incurred by the company was not incurred for the purpose of making or earning the interest received by the company on the deposit of the share capital, and as such, office and establishment expenses unconnected with the earning of the company or keeping the company alive were not permissible deductions under section 57 of the Act. CIT v. New Central Jute Mills Co. Ltd. : 118ITR1005(Cal) is a case where a loan obtained on interest from the Government for erection of a chemical plant was kept in deposit in bank till utilisation for stipulated purpose and interest was earned thereon and a question arose whether the difference between the interest earned from bank and the interest paid to the Government could be claimed as revenue expenditure. The Calcutta High Court took the view that the interest paid on the loan is to be capitalised and added to the cost of the plant and as the purpose of the loan was not to utilise the same for earning interest from bank and the interest paid was not incurred solely and wholly for earning interest from the bank, the same cannot be allowed as a deduction from the interest earned, that though there was some nexus or connection between the interest paid to the Government and the interest earned from the bank, the nexus being that both the items of interest were either earned or paid on the amount of loan, yet the assessee had failed to establish that it was its purpose or one of its purposes to utilise the amount received on loan fro earning interest; that the assessee had not established that the expenditure was incurred solely and wholly for the purpose of earning interest from the bank; and that, therefore, the sum paid to the Government as interest on moneys borrowed from it was not allowable as a deduction against the interest earned from the bank. CIT v. United Wire Ropes Ltd. : 121ITR762(Bom) is a case where an assessee had kept the share capital raised by it in bank deposit due to restrictions on remittance which earned interest and interest was also paid on foreign exchange loan. A question arose as to whether the interest paid on foreign exchange loan can be set off against the interest received on the investment of capital. The Bombay High Court has taken the view that the transaction of deposit of the share capital with the bank and the transaction of foreign exchange loan are not interconnected, and, therefore, there can be no claim of set-off of interest received. In Addl. CIT v. Madras Fertilisers Ltd. : 122ITR139(Mad) , a question arose whether the interest paid on borrowings could be claimed as a deduction from the interest received on bank deposits which is taxable under the head 'Other sources' and this court held that the interest received by the assessee on its deposits in the special account constituted its income, that though the setting up of a factory may be a preliminary and essential step for the purpose of carrying on the business of the assessee, it cannot be said to be carrying on the business itself, that as the borrowings was for the putting up of the plant, and investment in the special account was only till the money was utilised for purchase of capital goods, the borrowing itself was not for the purpose of depositing the money and earning interest and hence payment of interest cannot have any direct connection or nexus with the receipt of interest, that the interest paid by the assessee to the bank cannot be said to be an expenditure laid out wholly for the purpose of earning interest from the deposit the assessee had made in the special account and the assessee was not, therefore, entitled to deduction of the interest paid on its borrowings from the interest received on the deposits under section 57(iii). The learned counsel for the Revenue also relies on the decision in CIT v. Balakrishnan and Bros.(P.) Ltd. : 95ITR284(Mad) , in support of his submission that the interest paid on the borrowings made for the purchase of plant and machinery will be taken to be an expenditure incurred by the assessee in acquiring the machinery, and it will go to add to the actual cost of the machinery and, therefore the entire interest paid on the amounts borrowed for the purpose of erection of the factory in this case should be capitalised and be treated as cost of setting up of the factory. In CIT v. Balakrishnan and Bros.(P.) Ltd. : 95ITR284(Mad) , a Division Bench of this court of which one of us was a party considered a case, where the assessee had borrowed various amounts for the purchase of machinery for setting up a factory and had paid interest on those borrowings during the relevant assessment year. A question arose as to whether the assessee is entitled to claim capitalisation of the amount paid by way of interest. This court held that the interest paid on the amounts borrowed for the purchase of machinery had rightly been capitalised as part of the cost of the machinery and that the Tribunal was right in allowing the assessee's claim for depreciation and development rebate on this amount also. The learned counsel for the assessee, however, points out that but for the borrowing of the funds from the Industrial Credit and Investment Corporation and the Export and Import Bank of Washington, the amount could not have been invested and, therefore, the interest paid on those amounts should be taken to be an expenditure which should be allowed as deduction from the interest received as it had invested the amounts borrowed. In support of this plea, reference has been made to the decision in CIT v. Rajendra Prasad Moody : 115ITR519(SC) . In that case, the assessee had borrowed monies for the purpose of making investment in certain shares and paid interest thereon during the accounting period relevant to the assessment year but did not receive any dividend on the shares purchased with those monies. A question arose as to whether the interest on monies borrowed for investment in shares which had not yielded any dividend wa admissible as a deduction under section 57(iii) of the Income-tax Act, 1961, in computing its income from dividend under the head 'Income from other sources', and the Supreme Court held that what section 57(iii) requires is that the expenditure must be laid out or expended wholly and exclusively for the purpose of making or earning income, that the section does not require that this purpose must be fulfilled in order to qualify the expenditure for deduction : it does not say that the expenditure shall be deductible only if any income is made or earned, and, therefore, the assessee in that case is entitled to claim deduction of the interest payment under section 57(iii) of the Act. But the said decision of the Supreme Court relied on by the assessee is quite distinguishable on facts. There, the amounts were borrowed specifically for purchasing shares for the purpose of earning income and interest has been thereon. The said amount of interest was not allowed to be deducted only on the ground that during the accounting period, no amount had been earned. On those facts, the Supreme Court held very rightly, if I may say so with respect, that once the expenditure has been incurred for the purpose of earning income by way of dividends, the same cannot be disallowed merely on the ground that the expenditure has not resulted in earning any interest. We do not see how the principle of that case will apply to the facts of this case when, admittedly, the amounts have been borrowed for the purpose of establishing a factory and the interest paid on those amounts will go to add to the cost of setting up of the factory, if there is a delay in so setting up. The interest earned by investing that amount on short-time deposits has nothing to do with the actual borrowing and, therefore, the payment of interest has no connection with the receipt of interest on those amounts. In this case, admittedly, the borrowing has not been made exclusively and solely for the purpose of earning interest in which case alone it should be taken as an income which should be deducted from the interest receipts.
6. The learned counsel for the assessee then relies on a decision of this court in CIT v. Irani  143 ITR 540 to which one of us was a party, in support of his submission, that the liability to pay interest on the amounts borrowed should be allowed as a deduction from the interest receipt under section 57(iii) of the Act. We do not see how that decision will help the assessee in this case. There, the court was concerned with the urban land tax paid by a lessee as per the terms of the lease deed. A question arose as to whether the urban land tax liability which the owner of the property has to discharge can be claimed as a deduction by the lessee. This court held that the urban land tax paid is an expenditure deductible under section 57(iii) from the rental income by the assessee as a lease deed under which the tenant had taken the property for lease provided for the payment of tax by the assessee.
7. It is significant to note that in this case, since the assessee had not established its factory during the assessment year in question, there is no question of computation of business income during that year. Therefore, there is no question of application of sections 70 and 71 during the assessment year in question. Only in the computation of business income, expenditure or set-off of the less from the income from business will arise. Thus, on a due consideration of the matter, we are inclined to hold that the Tribunal is not right in this case in holding that the interest receipts cannot be assessed and that the difference between the interest paid and the interest received should be capitalised. We have to, therefore, answer the question referred to us in the negative and against the assessee and hold that the interest earned by the assessee on investment of share capital in call deposits could be assessed separately under the head 'Other sources' for the assessment year 1962-63. The assessee will pay the costs of the Revenue. Counsel's fee Rs. 500.