2003 (12) TMI 35 - HC - Income Tax

Interest paid on deposit - Whether, Tribunal was right in law in holding that the deposits of Rs. 15 lakhs made by Southern Investments with the assessee-company were not to be connected with the Bangalore project to say that the interest paid thereon was the cost of construction of the project? - The project itself was to be financed with the aid of the deposit obtained by the assessee, and by obtaining further funds at the cost and risk of the agent In this case, the relation of the agent here was not merely that of a marketing and selling agent, but was in fact that of a financier which provided part of the finance required directly, and agreed to remain liable for the additional finance which the assessee was to secure - question referred is, therefore, answered in negative and in favour of the Revenue and against the assessee.

Summary

Issues:
Interpretation of the purpose of deposits made by a firm with an assessee-company for a construction project.

Analysis:
The High Court of MADRAS addressed the assessment year 1984-85 concerning deposits of Rs. 15 lakhs made by a partnership firm, Southern Investments, with the assessee-company for a construction project in Bangalore. The agreement between the parties outlined the financing arrangements for the project, including the deposit as an interest-bearing security measure. The Commissioner concluded that the deposit was specifically for the Bangalore project, and there was no evidence of diversion for other projects or general working capital. The Assessing Officer disallowed the deduction claimed by the assessee, considering the deposit as part of the project cost. The Tribunal, however, disagreed and held that the funds were not directly linked to the project's construction cost, leading to the dispute.

The Court analyzed the agreement's terms and mutual obligations, emphasizing the deposit's purpose in financing the project's construction cost. Despite being termed a security deposit, the interest paid was deemed an expenditure related solely to the project in question. The Court rejected the assessee's argument that the interest cost should not be considered part of the project's work-in-progress, as the Assessing Officer correctly treated it as part of the project cost. Reference was made to accounting standards indicating that finance costs related to specific contracts should be included in project costs.

The Court highlighted that the deposit was received explicitly for financing the project and was viewed as such by both parties. The agent's role extended beyond marketing to providing direct finance and guaranteeing additional funds for the project. Consequently, the Court ruled in favor of the Revenue, determining that the interest paid on the deposit was a legitimate part of the project cost. The judgment clarified the specific attribution of finance costs to a particular contract, emphasizing their inclusion in project costs when directly related to the project's activities.

In conclusion, the Court's decision upheld the connection between the deposit, interest paid, and the construction project's cost, emphasizing the project-specific nature of finance costs and their requisite inclusion in project expenses.