Credit for TDS to be allowed even when the income is capitalised and not directly offered to tax.

The assessee was a domestic company engaged in the business
of co-generation of power. It had earned interest income of Rs. 51,21,287 on
which tax was deducted at source. The said interest income arose out of a
statutory deposit made by the assessee. The said interest income was deducted
from expenditure incurred for the installation of machinery. The Assessing
Officer, however, did not give credit of tax deducted on this interest income on
the ground that the same was not offered to tax but was capitalised.

Relying on the decisions of Karnal Co-operative Sugar Mills
Ltd. (243 ITR 2) (SC) and Toyo Engg. India Ltd. v. JCIT, (5 SOT 616), the ITAT
held that :

(1) When deposit is linked with the installation of
machinery, income earned on such deposit is incidental to the installation.
Accordingly, the interest is a capital receipt and would go to reduce the
cost of asset. The assessee had rightly deducted the interest income from
the cost of asset and while doing so it has indirectly offered the income to
tax.

(2) When a particular income is received after deduction
of tax, the TDS has been duly deposited with the bank and the assessee has
received the requisite certificate to this effect, then on production of the
said certificate the assessee becomes entitled to the credit of
TDS even if the income is not directly offered for tax.

(3) The assessee should be rightly allowed the credit of
tax deducted. The Government cannot benefit by taking advantage of legal
technicalities.