2008 (8) TMI 10 - HC - Income Tax

Money deposited with the Bank towards margin money for issuance of letters of credit for import of capital goods interest earned on this amount should not be treated as income from other sources impugned deposited are not investment so interest earned is required to be credited against pre-operative expenses(pending capitalization) incurred by the Assessee - loss on account of foreign exchange rate fluctuation cannot be disallowed revenue appeal dismissed

Summary

Issues:
1. Addition of interest credited to pre-operative expenses to the income of the Assessee.
2. Disallowance of loss on account of foreign exchange rate fluctuation.

Analysis:

Issue 1:
The primary issue in this case revolves around the addition of interest earned by the Assessee on certain amounts deposited towards margin money for issuance of letters of credit for import of capital goods. The Assessing Officer treated this interest as income from other sources and taxed it accordingly. The Commissioner of Income Tax (Appeals) ruled against the Assessee, but the Tribunal favored the Assessee, holding that the interest amount cannot be taxed as income from other sources. The Revenue challenged this decision before the High Court. The High Court, after considering the arguments from both parties, found that the issue is settled in favor of the Assessee based on the Supreme Court's decision in Commissioner of Income Tax v. Karnal Cooperative Sugar Mills Ltd. The Supreme Court in the aforementioned case had ruled that interest earned on money deposited for specific purposes, such as opening a letter of credit for the purchase of machinery, should be adjusted against the cost of the machinery and not treated as income. The High Court noted that the Assessee's deposited amount was not idle money but was utilized for business purposes, and therefore, the interest earned should be credited against pre-operative expenses. Consequently, the High Court held that no substantial question of law arises in this regard.

Issue 2:
The second issue raised by the Revenue pertains to the disallowance of a substantial amount due to a loss incurred on account of foreign exchange rate fluctuation. However, the High Court pointed out that a previous decision by the Court in Commissioner of Income Tax v. Woodward Governor India P. Ltd. had already addressed this issue, stating that no substantial question of law arises in such cases. Therefore, the High Court dismissed the appeal in this matter based on the precedent set by the earlier judgment.

In conclusion, the High Court upheld the Tribunal's decision in favor of the Assessee regarding the addition of interest to pre-operative expenses and dismissed the appeal concerning the disallowance of the loss on foreign exchange rate fluctuation based on existing legal precedents.