2016 (11) TMI 1314 - HC - Income Tax

Interest income earned on the amount of deposit kept with the Bank for the purpose of opening of Letter of Credit (LC) used for the purchase of plant and machinery - taxability as income from other sources - Held that - In light of the direct decision of the Hon ble Supreme Court in the case of Karnal Cooperative Sugar Mills Ltd (1999 (4) TMI 7 - SUPREME Court) wherein held held that such interest was a capital receipt which would go capital shifted which would go to reduce cost of asset and that deposit of money was directly linked with purchase of plant and machinery and therefore any income earned on such deposit is incidental to the acquisition of the assets for setting up of plant and machinery. Thus we are of the opinion that the learned Tribunal has committed error in holding that the interest income earned on the amount of deposit kept with the bank for the purpose of opening letter of credit used for the purpose of plant and machinery would be taxable as income from other source . The question of law is answered in favour of the assessee and against the revenue

Summary

Issues:
1. Taxability of interest income earned on deposit kept with the bank for opening of Letter of Credit (LC) used for purchase of plant and machinery.

Detailed Analysis:

Issue 1: Taxability of interest income on LC deposit
The appellant challenged the Income Tax Appellate Tribunal's decision that interest income earned on the deposit for opening LC for plant and machinery purchase is taxable as "income from other sources." The appellant argued that the interest earned should not be taxable as it is directly linked to the acquisition of assets. The AO added the interest amount to the appellant's income, which was later deleted by the CIT(A) but reinstated by the Tribunal citing a Supreme Court decision in Autokast Ltd. However, the High Court referred to the Karnal Cooperative Sugar Mills Ltd case where it was held that interest on such deposits is a capital receipt reducing the cost of the asset. The High Court found the Karnal case directly applicable and ruled in favor of the appellant, stating that interest income on the LC deposit should not be taxed as "income from other sources."

In conclusion, the High Court held that the interest income earned on the deposit kept with the bank for opening LC used for purchasing plant and machinery should not be taxable as "income from other sources." The decision was based on the direct applicability of the Karnal Cooperative Sugar Mills Ltd case, distinguishing it from the Autokast Ltd case cited by the Tribunal and the Revenue. The appeal was disposed of in favor of the assessee.