TaxTMI 
TaxTMI 
2015 (1) TMI 100
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.... ended on 31.3.1995. It is said that for the assessment year in question a return showing nil income was filed, as during the aforesaid period the establishment was under installation and no production had commenced. However alongwith the return, statement of income and expenditure was filed vide Annexure A-1 and in this statement income from interest to the tune of Rs. 5,39,038/- on account of Short Term Deposit with the bank was indicated. The assessing officer made assessment under section 143(1)(a) of the Income Tax Act, 1961 (hereinafter referred to as 'Act' for short) and treating the sum of Rs. 5,39,038/- as income from "other sources" determined tax at Rs. 2,15,616/-, surcharge of Rs. 32,342/- and a certain addition under section 143 (1) (a) of the Act to the tune of Rs. 43,123/- was made. The total tax of Rs. 2,91,081/- was imposed. On this, interest, under section 234-B at Rs. 39,673/- was also added. Be it as it may be the assessee challenged the aforesaid by pointing out that interest income could not be added under the head income from other sources and as the question was a debatable one it could not be assessed as prima facie admissible under section 143(1)(a....
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....to the judgment of Supreme Court in the case of CIT v. Karnal Co-operative Sugar Mills Ltd. [2000] 243 ITR 2 and CIT v. Bokaro Steel Ltd. [1999] 236 ITR 315, Shri Nema argued that if the interest is earned from any amount which has got nexus with the activities that are inextricably linked with setting up of the capital structure of the company, then the interest cannot be treated to be received from other sources, but it should be treated as income received in connection with the business and therefore the exemption. 7. Refuting the aforesaid, Shri Sanjay Lal, learned counsel for respondent reiterated that the question involved in this case has already been considered finally in the case of Tuticorin Alkali Chemicals & Fertilizers Ltd. (supra) and M.P. State Industries Corpn. Ltd. (supra), but in the case of same assessee in I.T.A.No.238/2012 similar question of law framed has been rejected. He invites our attention to the order dated 29.4.2013 passed in I.T.A.No.238/2012 wherein the questions were framed in following manner :- "(i) Whether the Tribunal is correct in law in basing its finding on erroneous finding of AO about nexus of funds invested in FDR, and holding that the i....
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....nd that the deposit in the said case was like the one considered by the Supreme Court in the case of Tuticorin Alkali Chemicals & Fertilizers Ltd. (supra) and did not deem it appropriate to refer to the judgment in the case of Karnal Co-operative Sugar Mills Ltd. However in the present case the nature of deposit is similar to the deposit indicated in the case of Karnal Co-operative Sugar Mills Ltd. (supra) and therefore we are not inclined to accept the contention of Shri Sanjay Lal. That apart Shri Lal has cited a judgment of Delhi High Court in the case of CIT v. Indian Vaccines Corpn. Ltd. [2014] 363 ITR 295 but on going through the aforesaid judgment, we find that the said judgment only relied upon the judgment of Tuticorin Alkali Chemicals & Fertilizers Ltd. (supra) and the judgment of Bokaro Steel Ltd. (supra), there is no reference to the judgment in the case of judgment of Karnal Co-operative Sugar Mills Ltd. (supra) and the nature of deposit in the case and its nexus with the interest earned alongwith their relationship for the purpose of acquisition of assets for setting up of establishment. 10. Much emphasis was made by Shri Sumit Nema to say that when a contentious or ....
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....come of assessee was added as income received from other sources and tax was charged, as was done in the present case. 14. From the aforesaid it would be clear that even if the interest is earned by the assessee in the manner as is indicated to in the case of Tuticorin Alkali Chemicals & Fertilizers Ltd. (supra) by term deposit with the bank and it is held to be chargeable as income from other sources. In the case of Karnal Cooperative Sugar Mills Ltd. (supra), the principle laid in the case of Tuticorin Alkali Chemicals & Fertilizers Ltd. (supra) is reconsidered and it was found that in the said case the assessee had deposited the amount to open a letter of credit for purchase of machinery for setting up the plant. This was done in accordance to the agreement entered into by the assessee and the supplier and based on this it was found that this interest is earned on an amount deposited, which was primarily to be used for purchase of setting up of machinery, the interest earned on such deposit cannot be said to be interest or income received from other sources, but has to be considered as income received from business. 15. In the matter of Karnal Co-operative Sugar Mills Ltd. (su....
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....question of receipt of interest on the deposit and the nature of deposit has to be analyzed and its to be seen as to what is its nexus with setting up of capital structure of assessee company. If it is found that the receipt of interest has some nexus and are linked to certain factors relatable to the setting up of capital, they can be set-off against each other as they are considered to be capital which would go to reduce the cost of capital structure. 19. In the case of Tuticorin Alkali Chemicals & Fertilizers Ltd. (supra) interest was earned by investing in borrowed fund in short terms deposit which was an independent source of income and had no nexus with the construction activities. However in the case of Karnal Co-operative Sugar Mills Ltd. and Bokaro Steel Ltd. (supra) there seems to be a deviation from earlier thinking and it is found that if the deposit of money is directly linked with purchase of plant and machinery as is seen in the case of Karnal Co-operative Sugar Mills Ltd . (supra), then such income earned is held to be incidental to acquisition of assets for setting up of plant and machinery and exemption has been granted. That being so looking to the nature of dep....