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TMI Blog2021 (11) TMI 685X X X X Extracts X X X X X X X X Extracts X X X X ..... t. The following question of law is framed for consideration of the Court: "Whether in the facts and circumstances of the case, the interest derived from Short Term Deposit Receipts made by the Appellant to enable it to open letter of credit for procuring plant and machineries is incidental to the acquisition of assets and should be treated as receipts of a capital nature and cannot be taxed as income?" 3. The brief facts are that, for the Assessment Year (AY) in question, the Appellant - assesse filed return showing a loss of Rs. 17,81,76,910/-. In the statement of income, the interest on deposits were shown at Rs. 4,40,92,790/-, against which interest on loan at Rs. 22,22,69,701/- was claimed. The excess of interest paid over the inter ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the ITAT had misinterpreted the decision in Tuticorin Alkali Chemicals & Fertilizers Ltd., Madras v. Commissioner of Income Tax, Madras (supra). According to him, the observations in the said judgment were not against the case of the Appellant. He also placed reliance on the decisions of the Supreme Court in Commissioner of Income Tax, Bihar II, Patna v. Bokaro Steel Ltd., Bokaro (1999) 1 SCC 645 and Commissioner of Income Tax v. Karnal Co-operative Sugar Mills Ltd. (2000) 243 ITR 2 (SC). 9. Mr. Pattnaik pointed out that the facts of the present case were overlooked by the AO, the CIT (A) and the ITAT. Here Short Term Deposit Receipts (STDRs) were made by the Appellant to enable it to open letter of credit (LoC) for procuring plant and mac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ood in their true perspective. The relevant observations, understood in the context of the facts of the said case, in para 22 of the judgment, "the Company had surplus funds in its hands. In order to earn income out of the surplus funds, it invested the amount for the purpose of earning interest. The interest thus earned is clearly of revenue nature and will have to be taxed accordingly. The accountants may have taken some other view but accountancy practice is not necessarily good law." 13. The situation there involved placing surplus funds in deposits unlike the present case, where the interest earned on the STDRs created with the borrowed funds were fully utilized only towards the cost of the capital assets. This is also eviden ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... est so earned to adjust it against the interest paid on borrowed capital. The company was free to use this income in any manner it liked. However, while interest earned by investing borrowed capital in short-term deposits is an independent source of income not connected with the construction activities or business activities of the assessee, the same cannot be said in the present case where the utilization of various assets of the Company and the payments received for such utilization are directly linked with the activity of setting up the steel plant of the assessee. These receipts are inextricably linked with the setting up of the capital structure of the assessee Company. They must, therefore, be viewed as capital receipts going to reduc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Fertilizers Limited vs. CIT [1997] 227 ITR 172(SC), will not be attracted. The more appropriate decision in the factual situation in the present case is in CIT v. Bokaro Steel Ltd. [1999] 236 ITR 315 (SC)." 18. In the present case, the facts are akin to the decision in Karnal Co-operative Sugar Mills Ltd. (supra). Factually it is seen that the interest earned on the STDR was towards reducing the cost of the capital assets and therefore should not have been treated as revenue receipt in the hands of the Assessee. 19. Consequently, the question framed is answered in affirmative, i.e. in favour of the Assessee and against the Department. In other words, it is held, in the facts and circumstances of the case, that the interest earned ..... X X X X Extracts X X X X X X X X Extracts X X X X
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