Commissioner Of Income Tax v. M/S Arihant Threads Ltd

IN THE HIGH COURT OF PUNJAB AND HARYANA ATCHANDIGARH. I.T.A. No.176 of 2004 Date of decision: 6.10.2010 Commissioner of Income Tax. Vs. M/s Arihant Threads Ltd. -----Appellant. -----Respondent CORAM:- HON'BLE MR. JUSTICE ADARSH KUMAR GOELHON'BLE MR. JUSTICE AJAY KUMAR MITTAL Present:-Mr. Rajesh Katoch, Standing Counselfor the appellant. for the appellant. Mr. S.K. Mukhi, Advocate andMs. Jyoti, Advocatefor the respondent. --- ADARSH KUMAR GOEL, J. 1.This appeal has been preferred by the revenue underSection 260-A of the Income Tax Act, 1961 (for short, “the Act”)against the order dated 7.1.2004 of the Income Tax AppellateTribunal, Chandigarh in I.T.A. No.452/CHANDI/99 for theassessment year 1996-97 proposing to raise following substantialquestion of law:- “i)Whether on the facts and circumstances of the case,the Hon’ble Income tax Appellate Tribunal is justifiedin holding that interest received by the assessee wasa capital receipt and so is required to be set offthe Hon’ble Income tax Appellate Tribunal is justifiedin holding that interest received by the assessee wasa capital receipt and so is required to be set off against the project development and preoperativeexpenses?” 2.The assessee derived income from its businessactivities of manufacturing yarn. In the year in question, theassessee was in the process of setting up its industrial unit andreceived interest income from the Fixed Deposit Receipts by wayof margin money for import of machinery through the bank. Thesaid interest income reduced the cost of the industrial unit. TheAssessing Officer taxed the same, as income from other sources,rejecting the plea of the assessee that the interest only reducedthe cost of setting up the unit and was not received as income bythe assessee. On appeal, the CIT(A) upheld the plea of theassessee which has been affirmed by the Tribunal. The Tribunalobserved:- “31.In the instant case, the uncontroverted factsbefore us are that the assessee in the process ofsetting up its industrial unit for manufacture of yarnhad to import the machinery. There was anagreement between the assessee and the suppliers ofthe imported machinery and as per the terms of thisagreement the assessee was required to open LoC infavour of the suppliers of the imported machinery byway of fixed deposits in the form of hundred per centmargin money. Under the terms of the agreement,the assessee deposited the money in the bank toopen a LoC from its share capital money lying idle andunused for acquiring these assets. From theuncontroverted facts, one thing is established that theamount was deposited by the assessee in the bank as “31.In the instant case, the uncontroverted factsbefore us are that the assessee in the process ofsetting up its industrial unit for manufacture of yarnhad to import the machinery. There was anagreement between the assessee and the suppliers ofthe imported machinery and as per the terms of thisagreement the assessee was required to open LoC infavour of the suppliers of the imported machinery byway of fixed deposits in the form of hundred per centmargin money. Under the terms of the agreement,the assessee deposited the money in the bank toopen a LoC from its share capital money lying idle andunused for acquiring these assets. From theuncontroverted facts, one thing is established that theamount was deposited by the assessee in the bank as FDR to open a LoC out of the necessity for thepurpose of acquiring an asset, which means that theactivity of depositing the money out of the sharecapital was an activity incidental to the acquiring ofthe asset. In this case, from the facts it is clear thatthe assessee deposited the money only with apurpose to execute assessee deposited the moneyonly with a purpose to execute an agreement for thepurchase of the machinery and so the deposits weredirectly relatable to the acquisition of the asset andhence there was a direct nexus between the purchaseof machinery and the deposit of money in the bank.So, for acquiring the machinery for the purpose ofsetting up the industrial units, the interest incomeearned by the assessee could definitely reduce thecost of the machinery. Now, applying the law laiddown by the apex Court in its decisions (supra), reliedupon by the ld AR for the assessee, we find that thefacts in the instant case of the assessee are exactlyidentical to the facts of the case of Karnal CooperativeSugar Mills Ltd. (supra), decided by the apex court,because in the instant case also the assessee haddeposited the money to open a LoC for the purchase/import of the machinery required for setting up itsplant in terms of the agreement of the assessee withthe suppliers and on this money so deposited by theassessee from its share capital money, which waslying idle, on which the impugned interest has beenearned, in view of the decision of the apex court(supra), the deposit of money in the instant case ofthe assessee intrinsically linked with the purchase ofmachinery and so the interest was the capital receiptwhich would go to reduce the cost of machinery required to be purchased by the assessee. Hence,the order of the CIT(A) being in conformity with thedecision of the apex court (supra), in which even thefacts of the case of Tuticorin Alkali Chemicals andFertilizers Ltd. (supra) were also discussed, is liable tobe upheld. Accordingly, we confirm the order of theCIT(A) in this case and hold that the impugnedinterest received by the assessee was a capitalreceipt and so is required to be set off against theproject development and preoperative expenses.Consequently, the grounds of appeal taken by therevenue are rejected.” 3. The Tribunal relied upon judgment of this Court inKarnal Cooperative Sugar Mills Ltd.v. CIT233 ITR 531 (P&H)which was affirmed by the Hon’ble Supreme Court in CITv.Karnal Cooperative Sugar Mills Ltd.243 ITR 2, following earlierjudgment inCITv. Bokaro Steel Ltd.236 ITR 315 (SC). 4. We have heard learned counsel for the parties andperused the record. 5.It is not disputed that the deposit by the assessee andinterest accrued thereon was incidental to acquisition of asset asdeposit itself was made towards margin money for opening theLetter of Credit. This being the undisputed factual position, theTribunal was justified in holding that the matter is covered infavour of the assessee by judgments of the Hon’ble SupremeCourt in Karnal Cooperative Sugar Mills Ltd. and Bokaro Steel Ltd. 6. Accordingly, the question of law raised by the revenuehas to be decided against it. 7. The appeal is dismissed. (ADARSH KUMAR GOEL) JUDGE October 6, 2010ashwani 4. We have heard learned counsel for the parties andperused the record. 5.It is not disputed that the deposit by the assessee andinterest accrued thereon was incidental to acquisition of asset asdeposit itself was made towards margin money for opening theLetter of Credit. This being the undisputed factual position, theTribunal was justified in holding that the matter is covered infavour of the assessee by judgments of the Hon’ble SupremeCourt in Karnal Cooperative Sugar Mills Ltd. and Bokaro Steel Ltd. 6. Accordingly, the question of law raised by the revenuehas to be decided against it. 7. The appeal is dismissed. (ADARSH KUMAR GOEL) JUDGE October 6, 2010ashwani ( AJAY KUMAR MITTAL ) JUDGE