COMMISSIONER OF INCOME TAX Vs. VIDYUT STEEL LIMITED

JUDGEMENT

(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.

(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 :