2008 (5) TMI 198 - HC - Income Tax

Loan taken from bank for construction work and installation of machinery part of loan utilized for capital investment and balance money was not required for business at relevant time so it was kept in short-term deposit interest on that short-term deposit is assessable as Income from other sources u/s 56 - revenue s appeal allowed

Summary

Issues:
Appeal under section 260A of the Income-tax Act, 1961 against the order of the Income-tax Appellate Tribunal assessing interest on short-term deposits received by the assessee as income from other sources.

Analysis:
1. The appellant filed an appeal under section 260A of the Income-tax Act, 1961 against the order of the Income-tax Appellate Tribunal assessing interest on short-term deposits received as income from other sources. The appellant claimed that the interest earned on short-term deposits should not be assessed as income under the head "Income from other sources" under section 56 of the Act, as the intention behind the short-term loan was to reduce the cost of capital assets acquired for business purposes. The appellant argued that the interest earned does not constitute income of the company.

2. The Tribunal had earlier decided in favor of the assessee, holding that the income assessed by the Assessing Officer should be reduced to nil. The Revenue then appealed against this decision, which was dismissed by the Commissioner of Income tax (Appeals), affirming that the interest received could not be treated as income from other sources. Subsequently, the Commissioner of Income-tax, Shimla filed an appeal under section 260A of the Act, raising the substantial question of law regarding the treatment of the interest received on short-term deposits.

3. During the arguments, reference was made to the decisions of the Supreme Court in Tuticorin Alkali Chemicals and Fertilizers Ltd. v. CIT and CIT v. Autokast Ltd., where it was held that interest accrued on short-term deposits made from borrowed money for plant and machinery purchase should be assessed as income from other sources. The appellant argued that based on these legal precedents and the facts of the case, there was no scope for claiming exemption or rebate afresh before the Assessing Officer.

4. The respondent's counsel contended that unexplained expenditures highlighted in the records should be verified by the assessing authority, and a fresh evaluation of the benefit of those claims should be made. However, after hearing the arguments and examining the documents, the court held that the interest on short-term deposits received by the assessee during the assessment year was liable to be taxed under section 56 of the Act. The court concluded that the interest earned on short-term deposits should be treated as income from other sources, in line with the settled legal position, and allowed the appeal.

In conclusion, the High Court of Himachal Pradesh upheld the assessment of interest on short-term deposits as income from other sources under section 56 of the Income-tax Act, 1961, based on legal precedents and the specific circumstances of the case.