2016 (6) TMI 1049 - HC - Income Tax

Interest income - taxability - amount of deposit kept with the bank for the purpose of opening of Letter of Credit (LC) used for the purchase of Plant & Machinery - whether would be taxable as income from other sources and the same shall not got to reduce the preoperative expenses or the fixed assets of the appellant? - Held that - Considering the decision of the Hon ble Supreme Court in the case of Karnal Cooperative Sugar Mills Ltd (1999 (4) TMI 7 - SUPREME Court), the question which is raised in the present appeal is required to be answered in favour of the assessee as observed that it is not a case where any surplus share capital money which is lying idle has been deposited in the bank for the purpose of earning interest. The deposit of money in the present case is directly linked with the purchase of plant and machinery. Hence, any income earned on such deposit is incidental to the acquisition of assets for the setting up of the plant and machinery. - Interest shall go to reduce the cost of the asset - Decided in favour of the assessee

Summary

Issues:
1. Classification of interest income earned on deposits for opening Letter of Credit as 'income from other sources' or reducing preoperative expenses.

Analysis:
The case involved an assessee engaged in establishing a project to manufacture Cold Rolled Steel Sheets and Coils. The Assessing Officer considered the interest income earned on surplus funds deposited with banks for the purpose of opening Letters of Credit (LC) as 'income from other sources' instead of 'income from business.' The Assessing Officer held that the interest income could not be reduced from preoperative expenses since the assessee himself had categorized it as income from other sources. The CIT (Appeals) initially allowed the claim of the assessee, but the ITAT reversed this decision, leading to the present Tax Appeals.

The main issue revolved around whether the interest income earned on deposits directly linked to the purchase of plant and machinery should be treated as 'income from other sources' or considered as a capital receipt to reduce the cost of the asset. The assessee argued that the interest income was incidental to acquiring assets for setting up the plant and machinery, relying on a Supreme Court decision. On the other hand, the revenue contended that the interest earned was not directly connected to the business activities of the assessee's plant.

After considering the arguments and the Supreme Court decision cited by the assessee, the High Court concluded that the interest income earned on deposits for the purchase of plant and machinery should be viewed as a capital receipt. The Court emphasized that when funds are directly linked to acquiring assets, any income earned on such deposits is incidental to setting up the plant and machinery. Therefore, the interest income should be considered a capital receipt to reduce the cost of the asset. The Court disagreed with the ITAT's decision and modified the impugned judgment to favor the assessee, allowing the Tax Appeals accordingly.