M/S TUTICORIN ALKALI CHEMICALS AND FERTILIZERS LTD., MADRAS versus COMMISSIONER OF INCOME TAX, MADRAS

Citation: [1997] SUPP. 1 S.C.R. 528 · Decided: 08-07-1997 · Supreme Court of India · Bench: S.P. BHARUCHA · Disposal: Disposed off

Judgment (excerpt)

A 
B 
M/S TUTICORIN ALKALI CHEMICALS AND 
FERTILIZERS LTD., MADRAS 
v. 
COMMISSIONER OF INCOME TAX, MADRAS 
JULY 8, 1997 
[S.P. BHARUCHA, SUHAS C. SEN AND 
M. JAGANNADHA RAO, JJ.] 
C 
Income Tax, 1961-Sections 4, 56, 57-lncome from other sour-
ces-Taxability-Interest received by a Company from bank deposits and 
loans-lncome derived from funds bo1Towed for setting up the factory of the 
Company-Company had not yet commenced its business-Whether interest 
derived by the assessee from bo1Towed funds, invested in short tenn deposits 
would be chargeable to tax under the head 'l11co111e from other sources-Held, 
D yes-It should not be adjusted against the interest payable on bo1Towed funds. 
The petitioner company, incorporated for the purpose of 
manufacturing heavy chemicals, had taken term loans from various banks 
and financial institutions for setting up factories. That part of the 
borrowed funds which was not imfnediately required by the Company was 
E invested in short term deposits with banks. It had also given interest 
bearing loans io its employees to purchase vehicles. The company claimed 
that the interest income earned by the Company from the various loans 
given by the Company and also from the bank deposits was not eligible to 
tax as according to the accepted accounting Practice, interest and finance 
F charges along with other pre-production expenses will have to be 
capitalised, and that, therefore, the interest income should go to reduce 
the pre- production expenses, which would ultimately be capitalised. 
The Income Tax Officer rejected the assessee's claim. The 
Company's appeal to the Income Tax Appellate Tribunal was dismissed. 
G The question of law as fo 'whether, on the facts of and in the circumstances 
of the case, interest derived by the assessee from the borrowed funds which 
were invested in short term deposits with banks would be chargeable to 
tax under the head 'Income from other sources' or would go to reduce the 
interest payable by the assessee on the term loans secured by the assessee 
H from financial institutions, which would be capitalised after the 
528 
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TIITICORIN ALKALI CHEMICALS & FERTILIZERS LTD. " C.LT. MADRAS 
529 
commencement of commercial production was referred to this Court. 
A 
The Company argued that it had not commenced its business and 
the income was derived from funds borrowed for setting up a factory and 
therefore it should be adjusted against the interest payable on the 
borrowed funds, as according to accounting practice the interest earned B 
by the Company even before commencement of business from investing 
borrowed capital will have to be set olf against interest pay.tble by the 
Company on that borrowed capital. 
Disposing of the Reference, this Court 
c 
HELD: 1.1. Income attracts tax as soon as it accrues. The application 
or destination of the income has nothing to do with its accrual or taxability. 
If the capital is fruitfully utilised instead of keeping it idle the income thus 
generated will be of revenue nature and not accretion of capital. Whether the 
Company raised the capital by issue of shares or debentures or by borrowing 
will not make any difference to this principle. If borrowed capital is used for D 
the purpose of earning income that income will have to be taxed in accord-
ance with law. Income is something witjch flows from the property. Some-
thing received in place of the property will be capital receipt. The amount of 
interest received by the Company flows from its investments and is its in-
come and is clearly taxable even though the interest amount is earned by E 
utilising borrowed capital. The company, in this case, is at liberty to use the 
interest income as it likes. It is under no obligation to utilise this interest 
income to reduce its liability to pay interest to its creditors. It can re-invest 
the interest income in land or share, it can purchase securities, it can buy 
house property, it can also set up another line of business, it may even pay 
dividends out of this income to. its shareholders. There is no overriding title F 
of anybody diverting the income at source to pay the amount to the creditors 
of the company. [541-H; 542-A; 537-C-D] 
1.2. It is well-settled that tax is attracted at the point when the 
income is earned. Taxability of income is not dependent upon its 
destination or the manner of its utilisation. It has to be seen whether at G 
the point of accrual, the amount is of revenue nature. If 

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