High Court rules interest from short-term deposits during factory construction can be set off against loans

The High Court of Orissa directed the Tribunal to consider whether interest earned by a company from short-term deposits during the construction of its factory should be treated as income under 'Income from other sources' for the assessment year 1979-80. The court ruled in favor of the assessee, following the Andhra Pradesh High Court's view that such interest can be set off against interest paid on loans, with the balance being capitalized, rather than being treated as income. Both Justices G. B. PATNAIK and P. C. NAIK supported this decision, rejecting the Department's argument.

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Issues involved: Interpretation of interest earned on short-term deposits for assessment year 1979-80 as income under 'Income from other sources' or as capital to reduce the cost of setting up a factory.

Summary:
The High Court of Orissa directed the Tribunal to refer the question of whether the interest earned by a company from short-term deposits should be treated as income under 'Income from other sources' for the assessment year 1979-80. The company, engaged in manufacturing, had earned interest during the construction of its factory. The Income-tax Officer treated the interest as income from other sources, but the Tribunal, considering the business setup phase, concluded that the interest should reduce the cost of the plant. The Department argued that interest on short-term bank deposits is assessable as income from other sources, citing Madras High Court decisions. However, the Andhra Pradesh High Court held that interest earned on short-term deposits during business setup can be set off against interest paid on loans, with the balance capitalized. The High Court of Orissa agreed with the Andhra Pradesh High Court's view, ruling in favor of the assessee that the interest should not be treated as income under 'Income from other sources.'

Judgment by G. B. PATNAIK:
G. B. PATNAIK J. delivered the judgment, supporting the Tribunal's decision that the interest earned by the company from short-term deposits should not be considered as income under 'Income from other sources.' The court referenced the Andhra Pradesh High Court's stance that interest earned during business setup can be offset against interest paid on loans, with the remaining amount capitalized. The court found this view to be correct and ruled in favor of the assessee, against the Department's argument.

Judgment by P. C. NAIK:
P. C. NAIK J. concurred with the decision made by G. B. PATNAIK J., supporting the Tribunal's ruling that the interest earned by the company from short-term deposits should not be treated as income under 'Income from other sources.' The judgment favored the assessee, in line with the Andhra Pradesh High Court's interpretation regarding interest earned during business setup.

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