1. Purchase of plant and machinery — Deposit for letter of credit — Interest earned on deposit. (Para 2 )
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1999 Supreme(SC) 545
SUPREME COURT OF INDIA
R.P.Sethi : Sujata V.Manohar
Commissioner Of Income Tax, Haryana
Versus
Karnal Co-operative Sugar Mills Limited
Case No. : 2438 , 2439 of 1999
Date of Decision : 4/23/99
Interest earned on money deposited to open a letter of credit for purchasing plant and machinery is incidental to the acquisition of assets and not taxable as income derived from idle surplus capital.
Headnote:(A) Income Tax - Interest earned on deposits for letter of credit - Purchase of plant and machinery - Where money is deposited to open a letter of credit for the purchase of machinery required for setting up a plant in terms of an agreement with the supplier, and interest is earned on such deposit, the same is not a case of surplus share capital lying idle - Such deposit is directly linked with the purchase of plant and machinery, and any income earned thereon is incidental to the acquisition of assets for the setting up of the plant and machinery. (Para 2)
Facts of the case:
The assessee deposited money to open a letter of credit for the purchase of machinery required for setting up its plant as per an agreement with the supplier. Interest was earned on the money so deposited.
Findings of Court:
The deposit of money was directly linked with the purchase of plant and machinery. Consequently, any income earned on such deposit is incidental to the acquisition of assets for the setting up of the plant and machinery.
Issues: Whether interest earned on money deposited for opening a letter of credit to purchase plant and machinery is taxable as income or is incidental to the acquisition of assets.
Ratio Decidendi: Income earned on deposits specifically made for the purpose of opening a letter of credit to acquire plant and machinery is incidental to the acquisition of those assets and not treated as income from idle surplus capital.
Result: Appeal dismissed.
Legal Category Hierarchy
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tax law
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income tax
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interest income
- incidental income (Para 2)
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interest income
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income tax
Table of Contents
2. Taxability of interest — Idle surplus capital vs. incidental income from asset acquisition. (Para 2 )
3. Deposit linked to machinery purchase — Interest incidental to asset acquisition — Distinction from idle surplus capital. (Para 2 )
4. Interest earned on deposits directly linked to the purchase of plant and machinery is incidental to the acquisition of assets. (Para 2 )
5. Leave granted — Appeal dismissed — No order as to costs. (Para 1 , 2 )
6. Is interest earned on money deposited for a letter of credit to purchase machinery considered income from idle surplus capital?
No, such interest is incidental to the acquisition of assets for setting up the plant and machinery and is not treated as income from idle surplus share capital. (Para 2 )
7. When is income earned on bank deposits considered incidental to the acquisition of assets?
Income is incidental to the acquisition of assets when the deposit of money is directly linked to the purchase of plant and machinery, such as deposits for a letter of credit. (Para 2 )
8. Which legal precedent applies to interest earned on deposits specifically linked to the purchase of plant and machinery?
The ratio in CIT v. Bokaro Steel Plant is applicable, while the ratio in Tuticorin Alkali Chemicals & Fertilizers Ltd. v. CIT is not attracted in such factual situations. (Para 2 )
(1) LEAVE granted.
(2) IN the present case the assessee had deposited money to open a letter of credit for the purchase of the machinery required for setting up its plant in terms of the assessees agreement with the supplier. It was on the money so deposited that some interest has been earned. This is, therefore, not a case where any surplus share capital money which is lying idle has been deposited in the bank for the purpose of earning interest. The deposit of money in the present case is directly linked with the purchase of plant and machinery. Hence, any income earned on such deposit is incidental to the acquisition of assets for the setting up of the plant and machinery. In this view of the matter the ratio laid down by this Court in Tuticorin Alkali Chemicals & Fertilizers Ltd. v. CIT will not be attracted. The more appropriate decision in the factual situation in the present case is one CIT v. Bokaro Steel Plant. The appeal is dismissed. There will be no order as to costs.
