TMI Blog2005 (12) TMI 206X X X X Extracts X X X X X X X X Extracts X X X X ..... major plant and machinery purchased from Japan. The company opened L/C for import of plant and machinery from time-to-time. A lien was created for the equivalent amount of L/C deposited in this account. The assessee company earned interest on this deposit in foreign currency which was converted into rupees, either at the time of settlement of import transactions or on the date of balance sheet, whichever was earlier. The assessee claimed that this interest earned was not at all taxable. The assessee had also earned interest income from UCO Bank and State Bank of India during the year on fixed deposit placed with them. These deposits were required to be placed for opening of L/C for import of plant and machinery. Borrowed funds were utilized for making investment either as FDR or SFR and this interest was also not offered to tax in the light of Andhra Pradesh High Court decision in the case of CIT v. Nagarjuna Steels Ltd. [1988] 171 ITR 663, Patna High Court decision in the case of CIT v. Bokaro Steel Ltd. [1988] 170 ITR 522 and Delhi High Court decision in the case of CIT v. Indian Drugs and Pharmaceuticals Ltd. [1983] 141 ITR 134. Alternatively, a request was made that interest pa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tal receipt and cannot be treated as income from other sources as has been done by the Assessing Officer. This view q also finds support from the decision of Supreme Court in the case of CIT v. Canara Bank (63 ITR 328) which has subsequently been followed in the case of Universal Radiators 201 ITR 800. Therefore, the appellant will be allowed to claim set off of amount of Rs. 25,17,666 from its pre-operative expenses." He, however, upheld the taxability of interest on short-term investment of Rs. 2,31,941 by observing in paragraph 10 as under:- "10. Having said this, however, the question now remains regarding the taxability of Rs. 2,31,941 which is return on short-term investments. During the course of appeal, the appellant's representative submitted that temporary surplus money was invested by the appellant in public sector bonds for short period on which it had earned income as a difference between the purchase and sale price of the said bonds. As regards the income earned by the appellant on short-term investment in public sector bonds, this amount is clearly a revenue receipt in the hands of the appellant as purchase and sale of these public sector bonds was certainly neit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the memorandum and articles of association of the company. The company had also deposited certain sums with the Tamil Nadu Electricity Board. It had also given interest-bearing loans to its employees to purchase vehicles. Up to the assessment year 1980-81, interest earned by the company from the various loans given by the company and also from the bank deposits was shown as income and was taxed accordingly. For the accounting year ending on June 30, 1981 (assessment year 1982-83), the assessee received a total amount of interest of Rs. 2,92,440. In its return of income filed on June 22, 1982, the company disclosed the said sum of Rs. 2,92,440 as "income from other sources". It also disclosed business loss of Rs. 3,21,802. After setting off the interest income against the business loss, the company claimed the benefit of carry forward of net loss of Rs. 29,360. The company later on realized its mistake and on December 26, 1984, it filed a revised return showing business loss of Rs. 3,21,802. It claimed that according to the accepted accountancy practice, interest and finance charges along with other pre-production expenses had to be capitalized, and that, therefore, the interest in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ding to the principles of law, and not in accordance with accountancy practice. Accountancy practice cannot override section 56 or any other provisions of the Income-tax Act." 7. In the case of Autokast Ltd., a decision of three-judges Bench, it was observed that where the assessee kept the moneys borrowed from the Industrial Development Bank of India for purchase of plant and machinery in short-term deposits in banks and used it in bill discounting until payment for the plant and machinery, the interest earned on the deposits was not taxable in the hands of the assessee as income from other sources but would go to reduce the actual cost of the plant and machinery, the Department took an appeal to the Supreme Court. The Supreme Court reversed the decision of the High Court holding that the interest was taxable in the hands of the assessee. 8. In the case of Karnal Co-operative Sugar Mills Ltd, a decision of two-judges Bench, held as under:- "Held, that, in the present case, the assessee had deposited money to open a letter of credit for the 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 s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as with regard to the interest received from contractors and following Bokaro Steel Ltd., the question was answered in favour of the assessee. 11. In these circumstances, the interest earned by an assessee on money borrowed and deposited in fixed deposits would be taxable in view of the decisions of the Supreme Court in the case of Tuticorin Alkali Chemicals Fertilizers Ltd., Autokast Ltd and the interest which is received from the contractors or which has a direct link for the purchase of machinery would be adjusted against the cost of plant and machinery to be installed by the assessee. It is true that a two-judges Bench of the Supreme Court in the case of Karnataka Power Corporation held that interest out of borrowings made for the purchase of plant and machinery would not be Taxable in view of the Tuticorin Alkali Chemicals Fertilizers Ltd but the three-judges Bench decision of the Supreme Court in the case of Autokast Ltd. has held that such interest would be chargeable to tax as income from other sources. Therefore, respectfully following the aforesaid decision a larger Bench of the Supreme Court, we hold that the CIT(A) was not justified in giving relief to the assesse ..... X X X X Extracts X X X X X X X X Extracts X X X X
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