Decided on July 11,1994



A. Kalyanasundharam, Accountant Member - (1.) THE assessee limited company in this appeal has raised the objection against the inclusion of interest earned on short term deposits with banks during the period of construction as its income, without allowing it any deduction for the interest that has been paid by it to the financial institutions.
(2.) Shri Ganesan, the learned counsel for the appellant company submitted that, the construction is still under way is undisputed. He contended that, one of the activities of the assessee is to construct its factory and all activities that are carried out during such construction period, are only to facilitate construction. He contended that, one of such activities carried out is the arrangement of its finances in such a way that would reduce the burden of interest on the company, which would result in the reduction of the capital cost. He accordingly contended that, the interest earning activity being closely related to the construction activity, it is only proper that, the interest is adjusted towards the capital cost. He submitted that, he is supported by the Delhi High Court in Snam Progetti (S.P.A.) v. Addl. CIT [1981]132 ITR 70. Shri Ganesan submitted that there are few decisions of the High Courts directly on the point which are against the assessee and in that context the alternative plea of setting off the interest paid to the financial institutions for that period during which the funds remained invested in short term deposits, may be considered. He contended that, the statement of funds for the financial years December 1987, December 1988 and December 1989 show that, in the first year, the share capital as had been raised was fully invested in the capital assets. The finances having been raised from the second year only, it shows that the short term deposits are taken from out of the borrowed funds. He contended that, in the absence of any other finances being available and there being direct co-relation with the borrowed funds, to the extent of its utilisation in getting short term deposits, for the period of such deposits, the proportionate interest paid on borrowed funds to the extent of the amount invested should be allowed to be reduced from the interest earned on short term deposits.
(3.) THE learned counsel submitted that he derives support for his submission from the decision of the Supreme Court in Seth R. Dalmia v. CIT [1977] 110 ITR 644. He contended that, in the said case the assessee claimed interest paid to bank for delayed payment of the consideration for purchase of shares from it as a deduction from out of the dividend income and it was held as allowable. He submitted that, in this case the assessee had agreed to pay the consideration for the shares within the stipulated date, failing which he was liable to pay interest for delayed payment of consideration. Though, the interest paid had no direct link with the earning of the dividend, but, since, it was remotely connected, it was held as allowable. He pleaded that, the loan from the financial institution was primarily for investment in capital assets, but, during the intervening period the surplus funds available with it, were prudently invested with a view to generate some income on that term deposits, with the ultimate objective of reducing the total cost burden, the interest on loan in accordance with the like manner as decided by the Supreme Court in Seth R. Dalmia's case (supra).;

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