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TMI Blog2008 (4) TMI 822X X X X Extracts X X X X X X X X Extracts X X X X ..... ce despite assessee's failure to adduce any evidence in this regard? II. Whether on the facts and in the circumstances of the case, the learned Tribunal was legally justified in not applying the decision of the Hon'ble Supreme Court given in the case of Tuticorin Alkali Chemicals Fertilizers Ltd. v. CIT [1997]227ITR172(SC) despite the same being fully applicable to the facts of the present case? 3. A perusal of the two questions show, that the substantive question is question No. 2, inasmuch as the question is as to whether the matter was required to be decided on the basis of judgment of the Hon'ble Supreme Court, in the case of Tuticorin Alkali Chemicals Fertilizers Ltd. v. CIT [1997]227ITR172(SC) , or was rightly decided on the basis of the judgment of the Hon'ble Supreme Court, in the case of Karnal Co-operative Sugar Mills Ltd. (supra). 4. The facts are not in dispute, that the assessee had got open LC (letter of credit) worth Rs. 10 crores from the bank, for the purchase of plant and machinery from foreign suppliers, and for that purpose the assessee deposited a sum of Rs. 1.5 crores with the bank, as margin money in the form of FDRs, on which the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted for the purpose of manufacturing heavy chemicals, like Ammonia Chloride and Soda Ash. The company was incorporated in the year 1971, and its trial production commenced in 1982. For the purpose of setting up of factories, the company had taken term loans from various banks and financial institutions. The part of the borrowed fund, which was not immediately required, was kept invested in short-term deposits with the banks. Such investments were permitted in the memorandum and articles of association. On these short-term deposits, the assessee earned income to the tune of Rs. 2,92,440. The company disclosed business losses to the extent of Rs. 3,21,802, and claimed the benefit of carry forward of a net loss of Rs. 29,360. However, then the company filed a revised return, showing business loss of Rs. 3,21,802, and claimed, that the interest and finance charges along with other pre-production expenses are required to be capitalized, and therefore, the interest income of Rs. 2,92,440 should reduce the pre-production expenses, which would ultimately be capitalized, and pointed out, that in the previous year the company had incurred a sum of Rs. 1,13,06,068 by way of interest and finan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Counsel for the Revenue, including Autokast's case (supra), Commanded Cements Ltd's case (supra), Chandpw Sugar Co. Ltd's case (supra) and even the Kisan Sahkari Chini Mills' case (supra). 9. Then in Bokaro Steel's case (supra), the facts regarding the relevant assessment order, involving the questions of law, viz. whether on the facts and circumstances of the case the Tribunal was justified in holding that the interest received by the assessee company on the amount of Rs. 7,50,502, advanced to the contractors, was not taxable? Likewise, in next asst. yr. 1971-72 the question involved was as to whether the learned Tribunal was justified in holding that the interest received by the assessee company on the amount of Rs. 14,98,993, advanced to the contractor was liable to tax? The facts were, that the assessee was a corporation, wholly owned by the Government of India, and was assessed in the status of a company. It was incorporated in January 1964, with the object to construct and own integrated iron and steel works. During the assessment years under consideration, the work of the construction of the company's factory and installation of plant was in the p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... achinery, such receipts would go to reduce the cost of its assets. The receipts, therefore, were held to be of capital nature, and not liable to be taxed. Then in CIT v. Karnal Co-operative Sugar Mill's case (supra), again the judgments in Tuticorin and Bokaro Steel were considered, and in that case the interest earned in such circumstances, as in the present case, were held to be capital receipt, and not liable to tax. The judgment runs in one para only, and therefore we think it more appropriate to quote it in extenso. That is as under: In the present case, the assessee had deposited money to open a letter of credit for purchase of the machinery required for setting up its plant in terms of the assessee's agreement with the supplier. It was on the money so deposited that some interest has been earned. This is, therefore, 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... while the other two judgments proceed on the basis, that the income has the effect of reducing the cost of the capital asset, therefore, should be taken to be capital receipt. Of course, in Tuticorin's case (supra), it has been held, that application or destination of the amount received, is not relevant, but then, in the other two judgments, considering process and reasonings applied in Challapali's case (supra), it has been found, that it would reduce the cost of the capital asset. 12. In such circumstances the question is, as to which of the two views is required to be followed by this Court. That is precisely the substantial question of law framed by this Court while admitting this appeal. Tuticorin's case (supra) was decided by a Bench headed by three Hon'ble Judges, and Karnal Co-operative and Bokaro Steel's case (supra) are the cases decided by a Bench headed by two Hon'ble Judges, but since they adopted different line of reasoning, which clearly appears to be in line with the language of Section 43(1). 13. In that view of the matter, what we are required to consider is, as to whether the Tribunal was legally justified in not applying the judgme ..... X X X X Extracts X X X X X X X X Extracts X X X X
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