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PUNJAB & HARYANA HIGH COURT
Ashok Bhan and N.K.Agrawal JJ.
Karnal Co-operative Sugar Mills Ltd.
Versus
Commissioner Of Income-tax
Income tax Reference No. 73 of 1982,74 of 1982,
Decided On : JULY 31, 1997
INCOME TAX - Interest on fixed deposits - Whether taxable as income from other sources or to be adjusted against the cost of assets - Deductibility of expenditure incurred for opening letter of credit and interest on overdraft - Applicability of Section 80P(2)(c) exemption.
Fact of the Case:
The assessee, a co-operative society running a sugar mill, had received interest on fixed deposits during the assessment years 1976-77 and 1977-78. The assessee claimed that the interest income should be adjusted against the expenditure incurred in setting up the factory. The Assessing Officer, however, treated the interest income as "Income from other sources" and levied tax accordingly. The assessee appealed to the Commissioner of Income-tax and the Tribunal, but was unsuccessful.
Finding of the Court:
The Tribunal held that the assessee's business had not commenced and that the interest income was, therefore, taxable as "Income from other sources". The Tribunal also held that the expenditure incurred for opening a letter of credit and interest paid on overdraft could not be deducted from the interest income. The assessee challenged the Tribunal's order on these issues before the High Court.
Issues: 1. Whether the interest income was taxable as "Income from other sources" or should be adjusted against the cost of assets? 2. Whether the expenditure incurred for opening a letter of credit and interest paid on overdraft could be deducted from the interest income? 3. Whether the assessee was entitled to claim deduction under Section 80P(2)(c) of the Income-tax Act, 1961?
Ratio Decidendi: 1. The High Court held that the interest income was directly relatable to the activity of acquiring an asset from a supplier in whose favor a letter of credit was opened after paying money in fixed deposits. Since the two activities, namely, deposits made in the bank and the acquisition of machinery had a direct nexus, the interest income had to be associated with the cost of the asset so acquired. It was not a case of deposit of surplus money, entirely unconnected with any other activity of the assessee. The deposit of share capital money with the bank had a definite purpose and object. In this light, the interest earned by the assessee shall go to reduce the cost of the asset acquired out of the transaction. 2. The High Court held that the expenditures incurred by way of "letter of credit charges" and interest paid on the overdraft account were not eligible for deduction under Section 57 of the Act inasmuch as, it has not been established that these expenditures have been incurred by the assessee, so as to earn the interest. "Letter of credit charges" were paid to the bank for opening a letter of credit during the course of acquiring an asset from a supplier. Therefore, these charges were not paid, so as to earn interest on the fixed deposits. Similarly, interest paid on the overdraft money in the bank account is also not connected with the fixed deposits credited by the assessee for opening a letter of credit. 3. The High Court held that the assessee was not entitled to claim deduction under Section 80P(2)(c) of the Act since the society had not yet commenced production and, therefore, whatever activities had been undertaken, those were pre-operative activities.
Final Decision: 1. The High Court answered the first question in the negative, i.e., in favor of the assessee and against the Revenue. 2. The High Court answered the second question in the affirmative, i.e., against the assessee and in favor of the Department. 3. The High Court answered the third question in the affirmative, i.e., against the assessee and in favor of the Department.
N.K.Agrawal, J.
1. The following questions of law have been referred under Section 256(1) of the Income-tax Act, 1961 (for short "the Act"), at the instance of the assessee :
"1. Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the interest of Rs. 1,60,778 and Rs. 2,23,500 was required to be taxed as income from other sources for the assessment years 1976-77 and 1977-78, respectively ?
2. Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the interest earned in these two years should not be reduced from the cost of the assets ?
3. Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in not allowing deduction of Rs. 33,750 on account of letter of credit charges for the assessment year 1976-77 and Rs. 31,000 on account of letter of credit charges and Rs. 75,606 as interest paid on overdraft for the assessment year 1977-78 from interest income ?
4. Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that exemption under Section 80P(2)(c) was not allowable as the assessee did not have any income from business ?"
Questions Nos. 1 and 2 :
2. The assessee is a co-operative society running a sugar mill. A return for the assessment year 1976-77 (year ending June 30, 1975) was filed declaring loss amounting to Rs. 7,29,700 under the head "Business". For the next assessment year, the assessee declared loss of Rs. 20,19,450. The assessees factory had not commenced production either during the assessment year 1976-77 or the next year 1977-78. Sugar production had started from January 1, 1977. Loss in both the years was shown on account of various expenses incurred in connection with the setting up of the factory.
3. The Assessing Officer, during the course of assessment for the assessment year 1976-77, noticed that a sum of Rs. 1,60,778 had been received by the assessee-company by way of interest on certain fixed deposits. Similarly, the assessee had received interest amounting to Rs. 2,23,500 during the next year. The assessees plea was that the interest income was to be adjusted against the expenditure in both the years and thereafter, the balance expenditure shown as loss was to be treated as part of the capital expenditure.
4. The assessee went in appeal before the Commissioner of Income-tax against the levy of tax on the interest income, treating the same as income from other sources. The assessees plea was that an agreement had been entered into with Engineering Project (India) Limited for the purchase of certain machines. A letter of credit was required to be opened in the bank for Rs. 30 lakhs in favour of the supplier of the machine. For that purpose fixed deposits had to be made so as to finalise the agreement for the purchase of the machine. A sum of Rs. 27.5 lakhs was, therefore, deposited in the fixed deposits and thereupon a letter of credit was opened. The deposit was, therefore, in the nature of margin money paid to the bank for opening a letter of credit in furtherance of the agreement. The assessee had, therefore, argued that whatever interest income was earned, that could not be treated to be income from other sources but as part of the business income inasmuch as the process of business had already commenced and the factory was being set up. Alternatively, it was argued that if the interest income could not be treated to be "income from business" this should be adjusted and set off against the various expenditure incurred during the two years under assessment. The balance expenditure was required to be capitalised, being treated as part of the actual cost of the assets acquired by the assessee-company. The Commissioner did not agree with the assessees plea and treated the interest income as "Income from other sources" and upheld the order of assessment.
5. The assessee went in further appeal before the Tribunal in bot
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