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Issues Involved:
1. Whether the income from interest earned on Fixed Deposit Receipts (FDRs) amounting to Rs. 86,22,216 should be set off against 'Project Development and Preoperative expenses'. 2. Whether the interest earned on FDRs can be treated as income from business or income from other sources. 3. Applicability of the Supreme Court's decision in Tuticorin Alkali Chemicals & Fertilizers Ltd. v. CIT (227 ITR 172) to the present case. Detailed Analysis: Issue 1: Set Off Against Project Development and Preoperative Expenses The primary issue is whether the interest income earned on FDRs should be set off against the project development and preoperative expenses. The CIT(A) directed that the interest income of Rs. 86,22,216 be set off against these expenses. The CIT(A) held that the amounts received by the assessee were inextricably linked with the process of setting up its plant and machinery, thus such receipts would go to reduce the cost of its assets. The CIT(A) considered these receipts as capital in nature, not taxable as income from other sources. Issue 2: Nature of Interest Income The Assessing Officer (AO) treated the interest earned on FDRs as income from other sources, relying on the Supreme Court's decision in Tuticorin Alkali Chemicals & Fertilizers Ltd. v. CIT, which held that interest on surplus funds before the business commenced is taxable as income from other sources. However, the CIT(A) and the Tribunal found that the interest income was directly connected to the business activity of setting up the plant, thus it should be considered a capital receipt. The Tribunal upheld the CIT(A)'s decision, emphasizing the direct nexus between the deposit of money in FDRs and the acquisition of machinery for the project. Issue 3: Applicability of Supreme Court's Decision in Tuticorin Alkali Chemicals & Fertilizers Ltd. v. CIT The AO relied on the Supreme Court's decision in Tuticorin Alkali Chemicals & Fertilizers Ltd., which held that interest on deposits before the commencement of business is taxable as income from other sources. However, the CIT(A) and the Tribunal distinguished this case, noting that in Tuticorin Alkali, the funds were surplus and not directly linked to the setting up of the unit. In contrast, the present case involved funds placed in FDRs out of business necessity for setting up the plant. The Tribunal referenced other Supreme Court decisions, such as CIT v. Bokaro Steel Ltd. and Karnal Cooperative Sugar Mills Ltd., which held that interest income directly related to the acquisition of assets for setting up a plant should be considered a capital receipt and not taxable as income from other sources. Conclusion The Tribunal concluded that the interest income earned by the assessee on FDRs was a capital receipt, directly linked to the acquisition of machinery for setting up the plant. Therefore, it should be set off against project development and preoperative expenses. The Tribunal upheld the CIT(A)'s decision, rejecting the grounds of appeal by the Revenue. The appeal filed by the Revenue was dismissed.
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