M/S. MANDOVI PELLETS LMT. vs. THE COMMISSIONER OF INCOME TAX, CENTRAL CIRCLE, BANGALORE.

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RUIT/3/2016HC BombayHCBM05000612201615 June 2017Author: F. M. REIS,HON'BLE SHRI JUSTICE PRITHVIRAJ K. CHAVAN3 pages
AI SummaryRemanded

What did the High Court hold?

The High Court held that income generated from the fruitful utilization of capital, including borrowed capital, is of a revenue nature and is taxable. The Apex Court's judgment in Tuticorim Alkali Chemicals and Fertilizers Ltd. Vs Commissioner of Income-Tax (1997) 93 Taxman 502(SC) was relied upon. The Court observed that whether the capital is raised by issuing shares, debentures, or borrowing does not alter the principle. Income generated from investments, even if made with borrowed funds, is taxable. The fact that the company pays interest on borrowed money does not exempt the interest earned from tax. The judgment clarified that while expenditure might be deductible if the business had commenced, the interest earned is clearly income unless exempted under provisions like Section 10. The Court also noted that adjustment of interest payable against interest earned would depend on the Act's provisions, and expenditure might be capitalizable, but adjustment against income assessable under Section 56 is not permissible if not allowable under Section 57. The High Court answered the referred questions in the positive and in favour of the revenue. The reference was disposed of accordingly.

What were the facts?

This matter concerns a reference under the Income Tax Act, 1961, before the High Court of Bombay at Goa. The applicant is M/s. Mandovi Pellets Ltd., and the respondent is the Commissioner of Income Tax, Central Circle, Bangalore. Fourteen questions were referred to the High Court for decision. The High Court noted that the issues are no longer res integra, citing a judgment of the Apex Court in the case of Tuticorim Alkali Chemicals and Fertilizers Ltd. Vs Commissioner of Income-Tax (1997) 93 Taxman 502(SC). The judgment of the Apex Court discussed the nature of income generated from capital, whether raised by shares, debentures, or borrowing, and its taxability. The High Court directed the registry to send its order to the Income Tax Appellate Tribunal, Panaji, for further decision.

What were the issues?

1. Whether income generated from the utilization of capital, including borrowed capital, is of a revenue nature and thus taxable under the Income Tax Act, 1961? (Question of law, turning on the general principles of income taxation and specific provisions relating to the nature of receipts). Assessee's Contention: The judgment does not record any specific contentions made by the assessee (M/s. Mandovi Pellets Ltd.) before the High Court regarding the referred questions. The assessee was represented by Mr. P. Karpe, Advocate. Revenue's Contention: The revenue, represented by Mr. K. Arvinda, Advocate, did not present specific arguments as the High Court relied on a Supreme Court judgment. However, the underlying principle supported by the revenue is that income earned from the fruitful utilization of capital, even if borrowed, is taxable. The revenue would likely argue that interest earned is income unless specifically exempted under the Act, and the source of the funds (borrowed capital) does not alter its revenue character. The judgment refers to Section 10 and Section 56/57 of the Income Tax Act in the context of exemptions and deductions.

Which sections of the Income-tax Act were involved?

Section 10,Section 56,Section 57

AI-generated summary — verify with the full judgment below

IN THE HIGH COURT OF BOMBAY AT GOA REFERENCE UNDER INCOME TAX ACT NO. 3 OF 2016 M/S. MANDOVI PELLETS LMT. ... Applicant Versus THE COMMISSIONER OF INCOME TAX, CENTRAL CIRCLE, BANGALORE. ... Respondent Mr. P. Karpe, Advocate for the applicant. Mr. K. Arvinda, Advocate for the respondent. Coram:- F. M. REIS & PRITHVIRAJ K. CHAVAN, JJ. Date:- 15th June, 2017 P.C. Heard Mr. P. Karpe, learned Counsel for the applicant and Mr. K. Arvinda, learned Advocate for the respondent.

2.

In the above reference, it is not disputed that 14 question were came to be referred for decision of this Court.

3.

After hearing the learned Counsel for the applicant as well as the respondent, it is not disputed that the questions referred to this Court are no longer res integra in view of the judgment of the Apex Court report in (1997) 93 Taxman 502(SC) in the case of Tuticorim Alkali Chemicals and Fertilizers Ltd. Vs Commissioner of Income-Tax, wherein they have observed at paragraphs 14 and 15 thus:- "Para 14: In other words, if the capital of a company is fruitfully utilised instead of keeping it idle the income thus generated will

2 RUIT/3/2016 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 the purpose of earning income that income will have to be taxed in accordance with law. Income is something which flows from the property. Something 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 income and is clearly taxable even though the interest amount is earned by utilising borrowed capital. Para 15: It is true that the company will have to pay interest on 'anything which can properly be described as income is taxable under the Act unless expressly exempted'. The interest earned by the assessee is clearly its income and unless it can be shown that any provision like Section 10 has exempted it from tax, it will be taxable. The fact that the source of income was borrowed money does not detract anything from the Revenue character of the receipt. The question of adjustment of interest payable by the company against the interest earned by it will depend upon the provisions of the Act. The expenditure would have been deductible as incurred for the purpose of business if the assessees

3 RUIT/3/2016 business had commenced. But that is not the case here. The assessee may be entitled to capitalise the interest payable by it. But what the assessee cannot claim is adjustment of this expenditure against interest assessable under Section 56. Section 57 of the Act sets out in its clauses (i) to (iii) the expenditures which are allowable as deduction from income assessable under Section 56. It is not the case of the assessee that the interest payable by it on term loans are allowable as deduction under Section 57. 4. Taking note of the said observation, issue referred has to be answered in the positive and in favour of the revenue. Above reference accordingly stands disposed of.

5.

Registry is accordingly directed to sent the said order to the concerned Income Tax Appellate Tribunal, Panaji for further decision in accordance with law. PRITHVIRAJ K. CHAVAN, J. F. M. REIS, J. vn

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