Interest income on deposit for LC to buy machinery not taxable as "income from other sources"

The High Court held that interest income earned on a deposit for opening a Letter of Credit (LC) used to purchase plant and machinery should not be taxable as "income from other sources." The court relied on a precedent where it was established that interest on such deposits is a capital receipt reducing the cost of the asset. The decision favored the appellant, distinguishing it from a Supreme Court decision cited by the Tribunal. The appeal was disposed of in favor of the assessee.

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Issues:
1. Taxability of interest income earned on deposit kept with the bank for opening of Letter of Credit (LC) used for purchase of plant and machinery.

Detailed Analysis:

Issue 1: Taxability of interest income on LC deposit
The appellant challenged the Income Tax Appellate Tribunal's decision that interest income earned on the deposit for opening LC for plant and machinery purchase is taxable as "income from other sources." The appellant argued that the interest earned should not be taxable as it is directly linked to the acquisition of assets. The AO added the interest amount to the appellant's income, which was later deleted by the CIT(A) but reinstated by the Tribunal citing a Supreme Court decision in Autokast Ltd. However, the High Court referred to the Karnal Cooperative Sugar Mills Ltd case where it was held that interest on such deposits is a capital receipt reducing the cost of the asset. The High Court found the Karnal case directly applicable and ruled in favor of the appellant, stating that interest income on the LC deposit should not be taxed as "income from other sources."

In conclusion, the High Court held that the interest income earned on the deposit kept with the bank for opening LC used for purchasing plant and machinery should not be taxable as "income from other sources." The decision was based on the direct applicability of the Karnal Cooperative Sugar Mills Ltd case, distinguishing it from the Autokast Ltd case cited by the Tribunal and the Revenue. The appeal was disposed of in favor of the assessee.

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