Andhra HC (Pre-Telangana)
Commissioner Of Income Tax vs Vidyut Steel Ltd. on 21 March, 1995
Equivalent citations: 1995(2)ALT296, [1996]219ITR30(AP)
Author: T.N.C. Rangarajan
Bench: S.S. Mohammed Quadri, T.N.C. Rangarajan
JUDGMENT T.N.C. Rangarajan, J.
1. The admitted facts relating to the case are that the assessee was established with the main object of manufacture and sale of steel castings. For the asst. yr. 1979-80, corresponding to the previous year ended 31st May, 1978, the assessee had shown "Interest received" as Rs. 34,713. This amount consisted of three items; the first being a sum of Rs. 10,394 which represents refund of excess payment of interest to the Industrial Finance Corporation of India and a balance of Rs. 9,895 which represents interest earned by the assessee during the construction period on ten per cent margin money retained in the bank for the purpose of taking bank guarantee.
The question that arose for consideration was - Whether this amount of Rs. 9,895 paid as interest on margin money for backing up a bank guarantee, could be set-off against the bank commission and interest paid for taking the bank guarantee itself?
The CIT(A), accepted the claim of the assessee that the interest received should be set-off against bank guarantee commission and this was confirmed by the Tribunal.
At the instance of the Revenue, the following question of law has been referred for our decision :
"Whether, on the facts and in the circumstances of the case, the Tribunal is justified in holding that interest received on deposits in bank could not be brought to tax as income under the head 'Other sources' ?"
2. Learned counsel for the applicant submitted that the Tribunal had followed the decision of a Special Bench of the Tribunal, Hyderabad, in Nagarjuna Steels Ltd. vs. ITO which was confirmed by this Court in CIT vs. Nagarjuna Steels Ltd. 171 ITR 663 (AP), whereas, a subsequent decision of this Court in CIT vs. Derco Cooling Coils Ltd. had clarified that the source of the fund must have a nexus for the purpose of capitalising the interest. It was submitted that if the amount deposited had come from share capital, that amount would be the assessee's own fund and the interest derived will be taxable under s. 56 of the IT Act, 1961 (hereinafter referred to as "the Act"), whereas if the source of the money is from the deposit in the bank or borrowed from the bank, then the interest derived could be set-off against the interest payable on the borrowed funds. We are unable to accept this contention for two reasons. The first is that there was no investigation as to the question of the source of funds, which were used for giving margin money for obtaining bank guarantee. More significantly in the decision of this Court in CIT vs. Derco Cooling Coils Ltd. (supra), the accounting standards explained in the booklet "A Study on Expenditure during Construction Period", were approved. The summary of conclusions of that study was reproduced at page 383 of the said judgment, which is as follows :
"During the construction period, a project may earn income from miscellaneous sources - for example, share transfer fees, interest income, income from hire of equipment or asset and income from sale of products manufactured during the period of test runs and experimental production. It is recommended that such income should be set off against the related items of expenditure so that only the net amount of the expenditure is capitalised or treated as deferred revenue expenditure, as the case may be. In either case, consideration may have to be given to the question of providing for the income-tax liability on such income".
This summary indicates that there must be a nexus between the two transactions giving rise to the receipt and expenditure which can be set-off for taking the net amount either for capitalisation or even for treatment as "deferred revenue expenditure". It was by applying this principle to the facts of that case, where the amount of interest earned was on share capital amount and the expenditure incurred was in respect of borrowed capital, that this Court held that there was no nexus between the two and the set-off cannot be allowed. In the present case, applying the same principle of nexus, it is apparent that the interest earned on margin money for the purpose of obtaining the bank guarantee is so inextricably connected with the contract of guarantee itself, that such interest has to be set off against the bank commission paid for obtaining the bank guarantee and only the net amount can be taken as the expenditure for the purpose of obtaining the bank guarantee itself. Viewed from this angle, the said net expenditure, which was incurred during the construction period, would be capital expenditure and has to be capitalised according to the accounting standards.
In the circumstances, there is no question of isolating the interest received on margin money paid for obtaining the bank guarantee and assessing it as separate income under s. 56 of the Act. We, therefore, agree with the view of the Tribunal that the income derived on the margin money for obtaining the bank guarantee cannot be separately assessed under s. 56 of the Act.
3. The question referred is, therefore, answered accordingly in favour of the Revenue and against the assessee (sic). No costs.