- (1.) The Tribunal, New Delhi, has referred the following question of law under Section 256(1) of the IT Act, 1961 (hereinafter referred to as "the Act"), for opinion of this Court : "Whether, on the facts and in the circumstances of the case, the Tribunal was legally justified in holding that the interest earned on the amounts kept in special deposit account was a capital receipt and accordingly not liable to tax ?"
(2.) The present reference relates to the asst. yr. 1984-85.
(3.) Briefly stated, the facts giving rise to the present reference are as follows : Respondent-assessee is a co-operative society having its object of manufacture and sale of sugar. In order to attain its object, it had commenced erection of building and installation of machinery for the sugar mills for making the capital investment of building plant and machinery, etc. It had approached financial institutions, banks and accordingly obtained loan of little over Rs. 3.81 crores. The Industrial Finance Corporation of India (hereinafter referred to as "IFCI") is one of the major financial institutions which had advanced loan facilities vide agreement dt. 11th May, 1982. This agreement specified the manner of utilisation of the loan. This agreement also provided the manner in which the loans could be drawn and the manner in which the drawn amount should be kept in bank accounts. One of the clauses provided that the loan that is drawn should be kept in a special bank account with the scheduled bank which was duly approved by IFCI. All the deposits in this special bank account were subject to the scrutiny by the officer of IFCI or any other person authorised by it. The agreement required the assessee to obtain letter from the scheduled bank foregoing its right to set off or lien on such account. The assessee in compliance with the terms of loan agreement kept the money drawn on loan account in the said special bank account. The bank credited the account of the assessee with the interest earned on such special deposit account. Before the assessing authority it was contended on behalf of the respondent-assessee that such deposit account had been opened at the instance of the IFCI and, therefore, the interest earned on such special deposit account could not be said or treated as interest earned on idle funds during construction. The assessing authority rejected the contention of the respondent-assessee on the ground that whatever may be the circumstances, it was interest earned during the period of construction and, therefore, it was taxable as income from other sources. The assessing authority also rejected the contention of the respondent-assessee that the interest so earned could not be allowed to be set off against the capital cost of construction. The Tribunal, however, accepted the plea of the respondent on the ground that but for the insistance by the IFCI to open a special bank account, the assessee would not have opted for it. Therefore, the earning of the interest was entirely incidental to the terms and conditions specified by IFCI. According to the Tribunal, it was wrong to hold that the interest was earned on idle money kept in deposit with the bank. It was further held that since the special bank account represented loan amount drawn from IFCI, which was available and utilised only for the purpose of construction, erection of building, plant and machinery, etc., the earning of the interest on such special deposit account is entirely related to the compliance of the terms and conditions of the loan and would go to reduce the capital cost of construction. The amount of Rs. 86,537 representing interest earned on this special deposit account was held as not taxable as revenue income but deductible from the cost of construction.;