COMMISSIONER OF INCOME TAX Vs. COCHIN SHIPYARD LTD

JUDGEMENT

(1.) Pursuant to the direction given by this Court in an application under S.256(2) of the Income Tax Act, 1961 (in short 'the Act'), the following question has been referred for the opinion of this Court by Income Tax Appellate Tribunal, Cochin Bench (in short 'the Tribunal').

(2.) The factual position, as indicated in the statement of case, is as follows: The assessee was constructing the Shipyard at Cochin during the assessment year 1975-76. It had engaged various contractors for carrying out the civil and other construction work. As per the terms of the contract, the assessee was required to provide sufficient funds to them from time to time to carry out the work without interruptions. Assessee charged interest on the amounts advanced to the contractors and during the previous year relevant to the assessment year in question the interest so charged by the assessee amounted to Rs. 26,90,680/- on the amounts advanced by the assessee to the contractors. The amounts relatable to the respective contractors so far as interest is concerned was adjusted by the assessee against the contract amounts payable to them. In the assessment proceedings assessee claimed that the interest was part of the capital cost and hence not liable to tax.

(3.) The assessing officer did not accept the stand of the assessee and brought the amount to tax. But the first appellate authority ie., the Commissioner of Income Tax (Appeals) (in short 'the C.I.T (Appeals)') held that the interest amount was not taxable. It was observed that the amount was subsequently recovered by the assessee from the contract amount and therefore, it was not taxable. The matter was carried in appeal by the Revenue before the Tribunal who accepted the view of the C.I.T. (Appeals) and dismissed the appeal preferred by the Revenue. An application under S.256 (1) of the Act was not accepted and that is why an application under S.256(2) was filed and direction was given for referring the question.