Income and expenses of pre-commencement period

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: under section 148 were issued.

The assessee filed "nil" returns of income and also filed letters stating that the returns filed vide acknowledgment No 8869, dated February 14, 2000, for the assessment year 1997-98 and acknowledgment No 8871, dated February 14, 2000, for the assessment year 1998-99, have to be treated as the returns in response to the notices issued under section 148 of the Act. Further, notices under section 143(2) were issued on November 20, 2001. The assessing officer noticed that the statements filed along with the returns of income revealed that the assessee had incurred expenses prior to commencement of business and the assessee had also earned interest income on fixed deposits with the bank. Such income had been set off against the expenses.

The assessing officer was of the view that the interest received on short-term deposits in the bank during the pre-production stage was assessable as income from other sources. Aggrieved by the orders, the assessee filed appeals to the commissioner of income tax (appeals). The commissioner dismissed the appeals and confirmed the orders of the assessing officer. Aggrieved, the assessee filed appeals to the income tax appellate tribunal. The tribunal allowed the assessee’s appeals and set aside the orders of the commissioner of income tax (appeals).

Counsel appearing for the revenue submitted before the Madras High Court that the assessee had set off interest earned, prior to the commencement of the business operation, against the expenses. The assessee was wrong in setting off the interest prior to the commencement of the business operation, against the expenses. The interest income earned prior to the commencement of the business has to be assessed under the head “income from other sources”. Hence, the assessing officer was right in assessing the interest income under the head "income from other sources" and not allowing expenses as a deduction.

The income tax appellate tribunal held that in light of the Supreme Court decision in Tuticorin Alkali Chemicals and Fetilizers Ltd v CIT (227 ITR 172), it is only in the event of interest earned out of deposits made from borrowed funds that it would be in the nature of income. Share application monies do not fall in the category of borrowed funds and do not involve payment of interest. In effect, share application monies, etc, are gathered for being used in setting up of an industrial unit, purchase of assets, etc.