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TMI Blog2004 (1) TMI 309X X X X Extracts X X X X X X X X Extracts X X X X ..... pany had been incorporated with the object to carry out business of manufacturing of cotton and man-made fibre yarn. During the relevant previous year, it was engaged in setting up of a spinning unit and for this purpose it had to buy and import plant and machinery. Towards this, the assessee-company had opened up letters of credit (LoC) in favour of the suppliers through the banks who, in turn, accepted 100% margin money by way of fixed deposits for opening and issuing LoC. The Assessing Officer was of the opinion that the assessee had earned interest on these fixed deposits and the interest earned was deducted to reduce the preoperative and project development expenses, so he treated the interest as income from other sources and charged tax thereon, by relying upon the decision in the case of Tuticorin Alkali Chemicals Fertilizers Ltd. v. CIT [1997] 227 ITR 172 (SC), after rejecting the explanation of the assessee, wherein it had stated before the Assessing Officer that in the case of the assessee there was no choice but to compulsorily place the money in fixed deposits, so that LoC could be opened for import of plant and machinery etc. and that out of this very business necess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee has rightly disallowed the set off of interest earned on FDRs amounting to Rs. 88,22,216 against the project development and pre-operative expenses claimed by the assessee treating the same as income from other sources. She further submitted that even in the case of Bokaro Steel Ltd. , relied upon by the CIT(A) while allowing relief to the assessee, the Apex Court at relevant page 322 (236 ITR 315) observed that 'the advances which the assessee made to the contractors to facilitate the construction activity of putting together a very large project was as much to ensure that the work of the contractors proceeded without any financial hitch as to help the contractors. The arrangements which were made between the assessee-company and the contractors pertaining to these three receipts are arrangements which are intrinsically connected with the construction of its steel plant. The receipts have been adjusted against the charges payable to the contractors and have gone to reduce the cost of construction. They have, therefore, been rightly held as capital receipts and not income of the assessee from any independent source. Ld. DR further submitted that even from the decision ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... submissions of both the parties, perused the record and carefully gone through the orders of the tax authorities below. In order to appreciate the rival submissions of both the parties, we would like to refer to the case law cited by both the parties. In the case of Tuticorin Alkali Chemicals Fertilizers Ltd. , Their Lordships at page 175 held as under:- ". . . that the company has surplus funds in its hands. In order to earn income out of the surplus funds, it had invested the amount for the purpose of earning interest. The interest thus earned was clearly of revenue nature and would have to be taxed accordingly. The accountants might have taken some other view but accountancy practice was not necessarily good law. This was not a case of diversion of income by overriding title. The assessee was entirely at liberty to deal with the interest amount as it liked. The application of the income for payment of interest would not affect its taxability in any way. The company could not claim any relief under section 70 or 71 since its business had not started and there could not be any computation of business income or loss incurred by the assessee in the relevant accounting years. In ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... directly connected with or incidental to the work of construction of its plant undertaken by the assessee. The advances which the assessee made to the contractors to facilitate the construction activity of putting together a very large project was as much to ensure that the work of contractor proceeded without any financial hitch as to help the contractors. The arrangements which were made between the assessee-company and the contractors pertaining to these three receipts were arrangements which were intrinsically connected with the construction of its steel plant. The receipts had been adjusted against the charges payable to the contractors and had gone to reduce the cost of construction. They had, therefore, been rightly held as capital receipts and not income of the assessee from any independent source." It is also important to mention here that in this case their Lordships have also referred to the decision in the case of Tuticorin Alkali Chemicals Fertilizers Ltd. (supra). In the case of Karnal Co-operative Sugar Mills Ltd (243 ITR 2), their Lordships while confirming the decision in the case of Karnal Cooperative Sugar Milb Ltd (233 ITR 531), by applying their decision in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sion, their Lordships referred to their decisions in the case of Karnataka Power Corpn. as well as Tuticorin Alkali Chemicals Fertilizers Ltd. . 4.1 In the instant case, the uncontroverted facts before us are that the assessee in the process of setting up its industrial unit for manufacture of yarn had to import the machinery. There was an agreement between the assessee and the suppliers of the imported machinery and as per the terms of this agreement the assessee was required to open LoC in favour of the suppliers of the imported machinery by way of fixed deposits in the form of hundred per cent margin money. Under the terms of the agreement, the assessee deposited the money in the bank to open a LoC from its share capital money lying idle and unused for acquiring these assets. From the uncontroverted facts, one thing is established that the amount was deposited by the assessee in the bank as FDR to open a LoC out of the necessity for the purpose of acquiring an asset, which means that the activity of depositing the money out of the share capital was an activity incidental to the acquiring of the asset. In this case, from the facts it is clear that the assessee deposited the m ..... X X X X Extracts X X X X X X X X Extracts X X X X
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