Commissioner of Income Tax v. Jaypee Dsc Ventures Ltd

MANMOHAN, J MARCH 11, 2011 nm/dk/ks

* IN THE HIGH COURT OF DELHI AT NEW DELHI + ITA 357/2010 Reserved on : 16th December, 2010 % Date of decision: 11th March, 2011 Commissioner of Income Tax, Delhi-IV ..... Appellant Through: Mr.Sanjeev Sabharwal, Sr. Standing Counsel versus Jaypee DSC Ventures Ltd. ..... Respondent Through: Ms. S. Krishnan, Advocate CORAM: HON'BLE THE CHIEF JUSTICE HON'BLE MR. JUSTICE MANMOHAN 1. Whether reporters of the local papers be allowed to see the judgment? Yes 2. To be referred to the Reporter or not? Yes 3. Whether the judgment should be reported in the Digest? Yes DIPAK MISRA, CJ The present appeal preferred under Section 260A of the Income Tax Act, 1961 (for brevity "the Act") was admitted on the following substantial question of law: "Whether in the facts and circumstances of the case the Income Tax Appellate Tribunal was justified in deleting the addition of Rs.16,36,039/- on the ground that interest earned by the assessee on the fixed deposit receipt being capital in nature cannot be assessed as income from other sources solely on the foundation that the fixed deposit was made for submitting performance guarantee to the National Highways Authority of India?" 2. The facts giving rise to the present appeal are that the respondent – assessee filed its return of income for the assessment year 2003-04 on 21st September, 2003 declaring nil income. An order of assessment was framed under Section 143(3) on 29th March, 2006 determining the total income at Rs.16,38,039/-. The assessing officer treated the amount of interest income which had been set off against the project expenses as income from other sources and disallowed the same to be set off against the cost incurred on the project expenses. It is not in dispute that the assessee had furnished performance guarantee in favour of NHAI to get the contract awarded in its favour and to procure the said guarantee, it had kept the amount in a fixed deposit in the bank. The project was on BOT (Build-Operate-Transfer) basis where the promoters were required to bring in their own funds along with borrowed funds from bank/financial institutions for construction of the project. It is contended that the furnishing of bank guarantee had direct nexus with the carrying on of the project and, therefore, the said set off deserved to be allowed. 3. It was contended before the assessing officer that the interest on margin money against the said bank guarantee is inextricably linked and intrinsically connected with the execution of the contract awarded to the assessee company and hence, the interest so received is only incidental to the very execution of the project. The bank guarantee was an operational and compelling requirement on the part of the assessee company and, therefore, the interest earned on the margin sum was an incident directly connected with the construction of the road project. 4. The assessing officer placed reliance on the decision rendered in Tuticorin Alkali Chemicals and Fertilizers Limited v. CIT, [1997] 227 ITR 172 (SC) and came to hold that the interest received by the company on the bank deposit was taxable as income under the head "income from other sources". It was opined by the assessing officer that the expenditure made deserved to be set off against interest income which had a direct nexus with the earning of the same but in the case of the assessee, as the project expenses did not have even remote proximity with the earning of interest, the same could not be allowed to be set off against the interest income. 5. Being aggrieved by the aforesaid order, the assessee preferred an appeal before the CIT(A) and the Appellate Authority, after referring to the clauses in the agreement and the decisions rendered in SISCO v. CIT, 240 ITR 24 (Madras), Philips Carbon Block Ltd. v. CIT, 130 ITR 205 (Cal), Additional CIT v. Madras Fertilizer Ltd., 120 ITR 1399 (Madras), CIT v. Jose Thomas, 253 ITR 553 (Kerala), CIT v. Parekh Brothers, (2002) 258 ITR 43 (Kerala), Rani Paliwal v. CIT, 268