2021 (11) TMI 685 - HC - Income Tax

Interest on Short Term Deposit for Plant & Machinery = Capital Receipt, Not Taxable Income

The Court held that interest earned on Short Term Deposit Receipts for procuring plant and machinery should be treated as a capital receipt, not taxable ... Nature of receipt - Interest derived from Short Term Deposit Receipts - revenue or capital receipt - HELD THAT:- In the present case, the facts are akin to the decision in Karnal Co-operative Sugar Mills Ltd.[1999 (4) TMI 7 - SC ORDER]. Factually it is seen that the interest earned on the STDR was towards reducing the cost of the capital assets and therefore should not have been treated as revenue receipt in the hands of the Assessee. Consequently, the question framed is answered in affirmative, i.e. in favour of the Assessee and against the Department. In other words, it is held, in the facts and circumstances of the case, that the interest earned from STDRs made by the Appellant to enable to open LoC for procuring plant and machineries is incidental to such acquisition and should be treated as receipt of a capital nature and not taxed as income. Issues Involved:Interpretation of interest derived from Short Term Deposit Receipts for opening letter of credit as income or capital receipt.Analysis:1. Framing of Question of Law: The appeal challenged the order of the Income Tax Appellate Tribunal (ITAT) regarding the treatment of interest earned on Short Term Deposit Receipts (STDRs) for opening a letter of credit. The Court framed the question of law to determine if the interest should be treated as income or a capital receipt.2. Background and Assessment: The Appellant filed a return for the assessment year 1998-99, showing a loss but interest on deposits was claimed against interest on loans. The Income Tax Department treated the entire interest receipt as income from other sources and disallowed capitalization.3. Judicial Precedents: The Commissioner of Income Tax (Appeals) and ITAT concurred with the AO, relying on the Tuticorin Alkali Chemicals case, treating the interest as revenue. The Appellant argued citing Supreme Court decisions in similar cases.4. Arguments and Interpretation: The Appellant contended that the interest earned on STDRs was utilized for the project's purpose and should reduce the cost of the asset. The Department argued for treating the interest as income from other sources.5. Court's Analysis: The Court reviewed the facts and observed that the interest earned on STDRs was used for project payments and linked to borrowing for the project. The Court differentiated the present case from Tuticorin Alkali Chemicals, emphasizing the utilization of funds for the project.6. Legal Interpretation and Precedents: The Court analyzed the Tuticorin Alkali Chemicals case and other Supreme Court decisions, emphasizing that interest linked to setting up assets should be treated as capital receipt, not taxable income.7. Decision and Ruling: The Court held that the interest earned on STDRs for procuring plant and machinery was incidental to asset acquisition and should be treated as a capital receipt, not taxable income. The orders of the lower authorities were set aside, and the appeal was allowed in favor of the Assessee.8. Conclusion: The Court's detailed analysis and interpretation of legal precedents led to the ruling that the interest derived from STDRs for project purposes should be considered a capital receipt, aligning with the Appellant's argument and setting aside the lower authorities' decisions.9. Final Order: The Court directed the Department to treat the interest as a capital receipt, granting an urgent certified copy of the order as per rules.