Interest income on deposits for plant & machinery purchase is a capital receipt, reducing asset cost. Court ruling in favor.

The High Court held that interest income earned on deposits for purchasing plant and machinery should be treated as a capital receipt to reduce the cost of the asset. The Court found that such income was directly linked to acquiring assets and was incidental to setting up the plant and machinery. Therefore, the Court ruled in favor of the assessee, disagreeing with the ITAT's decision, and allowed the Tax Appeals.

---

---

Issues:
1. Classification of interest income earned on deposits for opening Letter of Credit as 'income from other sources' or reducing preoperative expenses.

Analysis:
The case involved an assessee engaged in establishing a project to manufacture Cold Rolled Steel Sheets and Coils. The Assessing Officer considered the interest income earned on surplus funds deposited with banks for the purpose of opening Letters of Credit (LC) as 'income from other sources' instead of 'income from business.' The Assessing Officer held that the interest income could not be reduced from preoperative expenses since the assessee himself had categorized it as income from other sources. The CIT (Appeals) initially allowed the claim of the assessee, but the ITAT reversed this decision, leading to the present Tax Appeals.

The main issue revolved around whether the interest income earned on deposits directly linked to the purchase of plant and machinery should be treated as 'income from other sources' or considered as a capital receipt to reduce the cost of the asset. The assessee argued that the interest income was incidental to acquiring assets for setting up the plant and machinery, relying on a Supreme Court decision. On the other hand, the revenue contended that the interest earned was not directly connected to the business activities of the assessee's plant.

After considering the arguments and the Supreme Court decision cited by the assessee, the High Court concluded that the interest income earned on deposits for the purchase of plant and machinery should be viewed as a capital receipt. The Court emphasized that when funds are directly linked to acquiring assets, any income earned on such deposits is incidental to setting up the plant and machinery. Therefore, the interest income should be considered a capital receipt to reduce the cost of the asset. The Court disagreed with the ITAT's decision and modified the impugned judgment to favor the assessee, allowing the Tax Appeals accordingly.

---