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Issues Involved:
1. Taxability of interest income earned during the construction period. 2. Set-off of miscellaneous receipts against capital expenditure. 3. Applicability of section 57(iii) of the Income-tax Act, 1961. Summary of Judgment: Issue 1: Taxability of Interest Income Earned During the Construction Period The primary issue was whether the interest income of Rs. 15,092 earned on deposits made from borrowed funds during the construction period should be taxed as revenue or set off against the interest payment of Rs. 7,79,297. The Tribunal held that the interest income should not be considered as revenue but should be set off against the interest payment, and the balance should be capitalized. The High Court affirmed this view, stating that the interest earned should be treated as part of a single account with the interest paid, and the net interest should be capitalized. The Court relied on the Institute of Chartered Accountants of India's guidelines and previous judgments to support this approach. Issue 2: Set-off of Miscellaneous Receipts Against Capital Expenditure The second issue was whether the amount of Rs. 4,900 received as miscellaneous income should be treated as a separate revenue receipt or set off against larger amounts of capital expenditure. The Tribunal held that the miscellaneous income should be set off against the capital expenditure, and only the reduced amount should be considered for determining the actual cost of assets. The High Court agreed with this approach, emphasizing that the proper method is to offset such income against related expenditure during the construction period. Issue 3: Applicability of Section 57(iii) of the Income-tax Act, 1961 In R.C. No. 8 of 1985, the question was whether the interest payable to Andhra Pradesh Industrial Development Corporation was wholly and exclusively incurred for earning the interest from short-term deposits within the meaning of section 57(iii). The Tribunal found that the interest income earned during the construction period should be set off against the interest expenses, treating them as a single transaction. The High Court affirmed this finding, stating that the interest income cannot be treated as "income from other sources" and should be set off against the interest paid. Additional Cases: - R.C. No. 12 of 1985: The High Court held that the interest received by the assessee on short-term deposits should be set off against the interest paid and the balance interest capitalized. - R.C. No. 79 of 1985: The High Court reframed the question and held that the bank interest received during the construction stage should not be treated as income from other sources but should go towards reducing the actual cost of capital assets. Conclusion: The High Court consistently held that interest income earned during the construction period should be set off against the interest paid on borrowed funds, and the net interest should be capitalized. This approach aligns with the guidelines provided by the Institute of Chartered Accountants of India and previous judicial decisions. The Court emphasized a realistic and holistic assessment of the financial transactions during the construction period.
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