2016 (1) TMI 226 - HC - Income Tax

Allowance of set off of interest income earned on the fixed deposits kept for arranging bank guarantees towards the cost of capital assets - whether the interest earned by the assessee on the fixed deposits kept for managing bank guarantees during pre-operative period would reduce the cost of the capital assets? - ITAT allowed the claim - Held that - The substantial question of law is answered against the revenue and in favour of the assessee as as in the present case the assessee had earned interest income on the fixed deposits kept for arranging bank guarantees in the formative period and not that the surplus funds were utilized for earning additional interest income - Decided against revenue

Summary

Issues Involved:
1. Delay in re-filing the appeal.
2. Set-off of interest income earned on fixed deposits towards the cost of capital assets.
3. Applicability of various judicial precedents.

Detailed Analysis:

1. Delay in Re-filing the Appeal:
The court condoned a delay of 753 days in re-filing the appeal. This procedural aspect allowed the substantive issues to be heard.

2. Set-off of Interest Income Earned on Fixed Deposits Towards the Cost of Capital Assets:
The primary issue was whether the interest earned by the assessee on fixed deposits kept for managing bank guarantees during the pre-operative period would reduce the cost of the capital assets. The assessee, engaged in telecommunication services, had filed a return declaring an income of Rs. 12 lacs, but the Assessing Officer assessed the income at Rs. 75,00,960/-, treating the interest earned on fixed deposits as "Income from other sources" and not allowing it to be set off against pre-operative expenses.

The CIT(A) reversed this decision, relying on Supreme Court judgments in *Karnal Cooperative Sugar Mills Ltd. v. Commissioner of Income-Tax* and *Commissioner of Income-Tax v. Bokaro Steel Ltd.*, stating that interest income earned on deposits made for acquiring assets should reduce the cost of the asset.

The Tribunal upheld the CIT(A)'s decision, leading to the present appeal by the revenue.

3. Applicability of Various Judicial Precedents:
The court referred to several key judgments to adjudicate the issue:

- Karnal Cooperative Sugar Mills Ltd. v. Commissioner of Income-Tax: The court held that interest earned on fixed deposits made to open a letter of credit for purchasing machinery should reduce the cost of the asset, as it was directly related to the acquisition of the asset.
- Commissioner of Income Tax v. Bokaro Steel Ltd.: This case established that receipts inextricably linked with the setting up of capital structures should be treated as capital receipts, reducing the cost of construction.
- Commissioner of Income Tax v. Karnataka Power Corporation: The Supreme Court upheld that interest and hire charges from contractors, received during the pre-operative period, should reduce the capital cost.
- Bongaigaon Refinery and Petrochemicals Ltd. v. CIT: The court held that income received during the formative period towards renting of guest houses, equipment charges, and recoveries from contractors should reduce the cost of construction.

The court distinguished the present case from *Tuticorin Alkali Chemicals and Fertilizers Ltd. v. Commissioner of Income-Tax*, where surplus funds were invested to earn interest, which was held as "Income from other sources". In the present case, the interest was earned on deposits made for arranging bank guarantees, directly linked to the acquisition of capital assets, thus not applicable under the *Tuticorin Alkali* ruling.

Conclusion:
The substantial question of law was answered against the revenue and in favor of the assessee. The court found no merit in the revenue's appeal and dismissed it, affirming that the interest income earned on fixed deposits kept for arranging bank guarantees during the pre-operative period should reduce the cost of the capital assets.