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Commissioner of Income Tax-II, Chandigarh Versus M/s Essar Commvision Ltd. (now HFCL Infotel Ltd.) , Mohali

2016 (1) TMI 226 - PUNJAB AND HARYANA HIGH COURT

Allowance of set off of interest income earned on the fixed deposits kept for arranging bank guarantees, towards the cost of capital assets - whether the interest earned by the assessee on the fixed deposits kept for managing bank guarantees during pre-operative period would reduce the cost of the capital assets? - ITAT allowed the claim - Held that:- The substantial question of law is answered against the revenue and in favour of the assessee as as in the present case, the assessee had earned i .....

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been preferred by the revenue under Section 260A of the Income Tax Act, 1961 against the order dated 24.5.2006 (Annexure A-3) passed by the Income Tax Appellate Tribunal, Chandigarh Bench 'A', Chandigarh, in ITA No. 539/Chandi/2004, for the assessment year 1998-99, claiming the following substantial question of law:- Whether the Tribunal in the facts relevant to the case and in law was right in allowing set off, of interest income earned on the fixed deposits kept for arranging bank gua .....

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deposit relating to pre-operative period constitutes income assessable under the head 'Income from other sources' and such income could not be set off against the pre-operative expenses, the assessing officer assessed the interest amounting to ₹ 62,93,942/- under the head 'Income from other sources' for which he drew support from Tuticorin Alkali Chemicals and Fertilizers Ltd. v. Commissioner of Income-Tax, Madras, (1997) 227 ITR 172 and Commissioner of Income-Tax Vs. Coro .....

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) 236 ITR 315 (SC). Being dissatisfied, the revenue filed an appeal before the Tribunal who vide order dated 24.5.2006 (Annexure A-3) following its earlier order dated 14.11.2005 in the case of the assessee for the assessment years 1999-2000 and 2000-01 in ITA Nos. 614- 15/Chandi/2003 upheld the order of the CIT(A) and dismissed the appeal. Hence, the present appeal. 4. Learned counsel for the revenue submitted that the assessee was required to explain the purpose for which the interest income h .....

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ommissioner of Income-Tax v. Manglam Cement Ltd., (1996) 217 ITR 369 (Raj); (iv) Commissioner of Income-Tax v. Pandian Chemicals Ltd. (1998) 233 ITR 497 (Mad); (v) Commissioner of Income-Tax v. Autokast Ltd., (1998) 229 ITR 789 (Ker.); (vi) Southern Herbals Ltd. v. Settlement Commission (IT&WT) and another, (2003) 261 ITR 681 (Kar.); 5. The primary issue that arises for consideration in this appeal is whether the interest earned by the assessee on the fixed deposits kept for managing bank gu .....

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had kept part of share capital as fixed deposit to open a letter of credit under agreement for purchase of machinery. The question arose as to the nature of taxability of receipt of interest on such fixed deposit. It was held by this Court that the interest was not assessable as income from other sources as it was directly related to acquisition of the asset and would reduce the cost of the asset. The relevant conclusion reads thus:- In the case of the assessee before us, it has already been see .....

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osited so as to open a letter of credit has not been controverted. Therefore, the activity of depositing money out of the share capital was an activity incidental to the acquisition of the asset. It was not a case where surplus share capital money was deposited with the bank because it was lying unutilised and idle. The assessee deposited the money with the bank with a definite purpose to execute an agreement for the purpose of acquiring the machine. There is, however, no evidence on record to s .....

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deposit of money in the -bank. This nexus shall bring about a presumption in the assessee's favour that the money was deposited not without a purpose but with the object of acquiring a machine from the supplier. Such interest income being directly relatable to the terms of the contract for acquiring a business asset should go to reduce the cost of the asset. As has been seen, the Supreme Court in CIT v. U. P. State Industrial Development Corporation [1997] 225 ITR 703 took notice of the acti .....

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towards the cost and no income was earned by the underwriter. Following the ratio laid down by the Supreme Court in CIT v. U. P. State Industrial Development Corporation [1997] 225 ITR 703, it has to be concluded, in the present case, that the interest income earned by the assessee was directly relatable to the activity of acquiring an asset from a supplier in whose favour a letter of credit was opened after paying money in fixed deposits. Since, the two activities, namely, deposits made in the .....

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st the aforesaid pronouncement was dismissed by the Apex Court in Commissioner of Income Tax v. Karnal Cooperative Sugar Mills Ltd. (2000) 243 ITR 2 with the following observations:- Leave granted. 2. 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 so deposited that some interest has been earned. This is, therefore, n .....

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be attracted. The more appropriate decision in the factual situation in the present case is in CIT v. Bokaro Steel Ltd. The appeal is dismissed. There will be no order as to costs. 9. In Bokaro Steel Ltd.'s case (supra), a two Judges Bench of the Apex Court was considering the case of an assessee who had received rent from its contractors for housing workers and staff employed by the contractor for the construction work of the assessee. The assessee had received hire charges for plant and m .....

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overed in pre-operative period were capital receipts and shall reduce the cost of construction. 10. In Commissioner of Income Tax v. Karnataka Power Corporation (2001) 247 ITR 268 (SC), a three Judge Bench of the Supreme Court was considering the issue where the assessee received interest and hire charges from contractors which were claimed as capital receipt reducing the capital cost. The Tribunal and the High Court decided the matter in favour of the assessee against which the revenue went in .....

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e of Tuticorin Alkali Chemcials and Fertilizers Ltd.'s case (supra) held that the above receipts are taxable in the assessee's hand. The Supreme Court while considering the issue held that the income was received by the assessee during formative period towards renting of guest house, charges for equipment and recovery from contractors towards water and electricity supply and they are covered by the decision of the Supreme Court in Bokaro Steel Ltd's case (supra) and, therefore, these .....

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ision in CIT v. Bokaro Steel Ltd. (supra) has been followed by a two-judge Bench of this Court in CIT v. Karnal Cooperative Sugar Mills Ltd. (2000) 243 ITR 2 (SC) and by a three-Judge Bench in CIT v. Karnataka Power Corporation (2001) 247 ITR 268 (SC). In fact, in the latter case, it was not disputed by the Revenue that the question that related to hire charges paid by contractors had to be answered in light of the judgment in Bokaro Steel Ltd's case (supra). It is, therefore, not possible n .....

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a) against which the Special Leave Petition (Civil) No. 17019 of 2008 was dismissed by the Apex Court on 6.1.2009. 13. Adverting to the judgment of the Apex Court in Tuticorin Alkali Chemicals and Fertilizers Ltd.'s case (supra) on which heavy reliance has been placed by the learned counsel for the revenue, therein the assessee had taken loans from banks and financial institutions for the purpose of setting up factories whereas surplus borrowed funds which were not required by the assessee w .....

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