TMI Blog2016 (1) TMI 226X X X X Extracts X X X X X X X X Extracts X X X X ..... een 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 guarantees, towards the cost of capital assets? 3. A few facts necessary for adjudication of the instant appeal as narrated therein may be noticed. The assessee is engaged in the business of providing telecommunication services and filed its return of income on 27.11.1998 declaring the income at ₹ 12 lacs. The Assessing Officer framed the assessment under Section 143(3) of the Act vide order dated 30.8.2000 (Annexure A-1) at ₹ 75,00,960/- by holding that the interest earned on the fixed 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, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he cost of the capital assets. 6. In order to effectively, adjudicate the controversy involved herein it would be advantageous to refer to various judgments on the subject as heavy reliance has been placed thereon by both the parties. 7. A Division Bench of this Court in Karnal Sugar Mill Ltd's case (supra) was considering the issue where the cooperative society was formed for running sugar mills and production had not started. The assessee 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 seen that money was deposited, to open a letter of credit under the terms of the agreement with the supplier of the machine. It was, therefore, not a case where surplus share capital money lying idle and unused had been deposited in the bank. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 bank and the acquisition of machinery have a direct nexus, the interest income has to be associated with the cost of the asset so acquired. It was not a case of deposit of surplus money, entirely unconnected with any other activity of the assessee. The deposit of share capital money with the bank had a definite purpose and object. In this light, the interest earned by the assessee shall go to reduce the cost of the asset acquired out of the transaction. 8. An appeal carried by the revenue against 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 requir ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Refinery and Petrochemcials Ltd. v. CIT (2001) 251 ITR 329 (SC) , the assessee received interest income, income from guest house, charges for equipment and recoveries from the contractors on account of water and electricity supply. The High Court, following the decision of the Supreme Court in the case 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 receipts will go to reduce the cost of construction. A relevant extract from the decision of the Supreme Court is quoted as under:- That was a case in which the question related to interest earned by a company during its formative period by investments. This court has held in CIT v. Bokaro Steel Ltd. (1999) 236 ITR 315 (SC) , that it is so confined and did not apply where the receipts ..... X X X X Extracts X X X X X X X X Extracts X X X X
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