TMI Blog2004 (8) TMI 331X X X X Extracts X X X X X X X X Extracts X X X X ..... ncome which was revised by return dt. 12th Sept., 1996. In the statement of income accompanying the revised return, the appellant showed the interest on deposit at Rs. 1,14,79,061 against which interest paid on the loan was Rs. 1,38,52,055. The balance loss was capitalised. For the asst. yr. 1996-97, the appellant filed return of income on 9th Dec., 1996, showing nil income. As per the statement of income, the appellant showed interest on deposit at Rs. 5,82,78,042 against which interest on loan from EPICOL for Rs. 6.40 crores was claimed. The balance loss was shown as transferred to capital work-in-progress. For the asst. yr. 1997-98, the assessee has shown interest income at Rs. 2,86,42,573 against which interest on loan at Rs. 7,77,61,116 was claimed. The excess interest paid over interest earned was capitalised. In the process of setting up of the steel plant, the appellant has borrowed interest-bearing loan of Rs. 40 crores from Government of Orissa on 12th Jan., 1995, with a special condition according to which this amount will be deposited in the banks/financial institutions/others and pledged to a bank to cover LC liability for import of ores and blast furnaces from Italy. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e plant of the appellant. 4. The CIT(A) also directed to examine whether the principles laid down by the Hon'ble Supreme Court in the case of Tuticorin Alkali Chemicals Fertilisers Ltd. are not applicable in view of the principles laid down in the case of Karnal Co-operative Sugar Mills (P) Ltd. and CIT vs. Bokaro Steel Ltd. (1999) 151 CTR (SC) 276 : (1999) 236 ITR 315 (SC). The CIT(A) also directed to find out whether there is any deposit of money with the bank which had issued LC and whether the deposit in another bank can be taken as margin money for availing LC. 5. In the de novo assessment proceedings, the AO completed the assessment on the same total income as in the original assessment. 6. The impugned order of the CIT(A) has been passed in the second round of appeal. As the CIT(A) found that the AO has not focused on the issues which were directed to be done in the first round of appeal, he, therefore, called for a remand report. The AO filed a detailed remand report in which observations were made regarding different dates on which loan was received by the assessee from the Government of Orissa, date on which deposit was made in SBI Capital Market, date of LC an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sources. This includes the interest received from the IT Department under s. 244 of the Act. (iv) Bidding fees will not be taxable as they are liable to be capitalised." 8. Aggrieved by the above order of the CIT(A), both the Revenue and the assessee have come in appeal before us. The grievance of the assessee is that CIT(A) was not justified in not treating part of the deposit earmarked for opening the LC for import of plant and machinery and thereby not allowing reduction of the interest income out of capital cost of the project, and at the very same time, treating part of the interest income on the same amount of deposit as taxable under the head "Income from other sources". The assessee has also grievance that interest earned from the deposit with the other banks and interest on refunds given under s. 244 of the IT Act should also be treated as capital receipt eligible for setting off against the capital cost of the project. On the other hand, the Department has grievance for not treating the entire interest income as income from other sources and thereby allowing part of such interest income to be set off against capital cost of the project, by treating the same as capi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dgment of the Hon'ble Supreme Court in the case of CIT vs. Auto Kast Ltd. (2001) 165 CTR (SC) 16 : (2001) 248 ITR 110 (SC), relied on by the AO, is not applicable to the facts and circumstances of the instant case, insofar as the money in the case of Auto Kast Ltd. was used by the assessee in bill discounting scheme for earning of interest income. There was no compulsion by the financial institutions granting the loan for utilisation of the amount advanced in any bill discounting scheme, but the loan was granted for acquisition of plant and machinery. In the instant case, as per the terms and conditions of the loan agreement with the Orissa Government, the assessee was having no option but to deposit the amount in the bank for opening LC by making pledge of such deposit receipt. Thus, as per the learned Authorised Representative, the case of Auto Kast Ltd. is of no help to the Revenue for deciding the nature of interest income. 11. In respect of other deposit given out of amount received from Orissa Government on account of equity and in respect of other funds temporarily deposited in the banks, the learned Authorised Representative submitted that the assessee-company took prude ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ilisers Ltd. is squarely applicable to the assessee's case insofar as surplus fund was deposited in the bank account on which interest income was generated and actually received by the assessee during the years under consideration. He further submitted that subsequent decision of the Hon'ble Supreme Court in case of Karnal Co-operative Sugar Mills Ltd. has not superseded the ratio laid down in case of Tuticorin Alkali Chemicals Fertilisers Ltd. He, therefore, submitted that making of deposit with the bank and import of plant and machinery is not having direct and proximate connection, so as to allow set off of interest income against the project cost. He further submitted that loan from Orissa Government and other financial institutions was taken by the assessee for the purpose of business, interest payable on such loan is to be allowed under s. 36(1)(iii) of the IT Act only after the commencement of business. During the period the machinery is installed and business is not commenced, such interest is required to be capitalised and allowed after commencement of business as per provisions of the IT Act, and there is no scope for allowing deduction of such interest expenditure agai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the bank, as to whether the interest income was capital receipt or revenue receipt. There is no dispute to the general principle that interest income bears the character of revenue receipt. But, this general principle is subject to the exception that when such interest income is received prior to the commencement of business and is having direct and proximate connection with the acquisition of fixed/capital asset during the course of implementation of the project, such interest income will take the character of capital receipt. This exception is also subject to further restriction that deposit on which interest income was earned was given out of business compulsion in order to enable the assessee to facilitate acquisition of fixed asset and not with an intention to earn interest thereon. If the facts and circumstances of the case warrant that deposit was given as a business compulsion and is having direct and proximate connection with the acquisition of fixed/capital asset, the interest income earned on such deposit will be in the nature of capital receipt not liable to tax. Such capital receipt is eligible to be set off against the capital cost of such assets. However, if giving o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t of interest on the borrowed funds would not affect its taxability in any way. It was also observed that if a person borrows money for business purposes, but utilises that money to earn interest, however temporarily, the interest so generated will be his income. He may or may not discharge his liability to pay interest with this income. Merely because it was utilised to repay the interest on the loan taken by the assessee, it did not seize to be his income." The Hon'ble Supreme Court further observed that the company had taken term loans from various banks and financial institutions for the purpose of setting up of the factories. That part of the borrowed funds which was not immediately required by the company, was kept invested in short-term deposits with the banks. The company also gave interest-bearing loans to the employees to purchase vehicles. The interest earned by the company from the above deposits and loans was sought to be capitalised reducing the pre-operative expenses. On these facts and circumstances, the Supreme Court held that interest flowing from such investments is taxable income and is to be taxed under the head "Income from other sources". The interest paid ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or opening of LC for importing machineries. The interest income earned on such deposits is thus directly connected and incidental to the acquisition of the plant and machinery. Thus, the principles laid down in Karnal Co-operative Sugar Mills Ltd. are squarely applicable to the interest earned on such amount of deposits which was compulsorily required to be made for importing plant and machinery. It does not make any difference, if during the intervening period, the assessee has withdrawn part of the funds from the SBI Caps and deposited in SBI, keeping in view the time gap when the LCs were going to be matured. Similarly, making the deposit on the date prior to the date of actual opening of LC will not change the character of such deposit, insofar as deposit was made with the intention of opening the LC. Thus, in view of the above discussion, we can reach to the conclusion that the interest earned on deposit made with SBI Caps and SBI during the intervening period was in the nature of capital receipt. 19. From the records we find that after making the deposit on 12th Jan., 1995, the assessee-company had applied to SBI for opening of foreign LC for importing machineries from Ita ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... deposit during the period such deposits were pledged as collateral for opening of LC, as capital receipts is concerned, we do not find any reason to interfere in his order. From the record we find that total of such interest amounts to Rs. 6,79,65,440 (as per the figures placed in paper book) in all the three assessment years under consideration. 25. In respect of interest on other deposits made with the other banks out of the amount received as equity or the loan amount disbursed by the financial institutions, but could not be utilised immediately by the assessee, as per our considered view, is to be treated as income from other sources. There was neither any business compulsion nor any condition by the financial institutions disbursing the loan, for depositing them in the bank for short period till the disbursed funds could be utilised in the implementation of the project. There was also no condition for making short-term deposit of the amount received by the assessee-company as an equity. We, therefore, agree with the learned Departmental Representative that the deposit was made in the bank with an intention to earn interest income, which is to be charged to tax as income fro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rs, we are of the view that it is of the similar nature as discussed by the Hon'ble Supreme Court in the case of Bokaro Steels Ltd. and, therefore, we are in agreement with the conclusion of the CIT(A) that such bidding fees are liable to be set off against the capital cost of project and does not form part of income from other sources. 27. We have also carefully gone through the order of the Hon'ble Supreme Court in case of Auto Kast relied on by the learned AO. We find that the facts in this case were different from the facts of the instant case insofar as deposit with the bank, in the case of Auto Kast was utilised by the assessee in bill discounting activities undertaken by it until the deposit amount was utilised for payment of plant and machinery, whereas in the instant case, the money deposited with the bank was kept intact and the fixed deposit receipt issued by the banker was pledged as a collateral security for opening LC which was required for import of plant and machinery. Thus, the ratio laid down by the Hon'ble Supreme Court in the case of Auto Kast is not applicable to the facts and circumstances of the instant case. 28. In the result, the appeals of the assess ..... X X X X Extracts X X X X X X X X Extracts X X X X
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