2016 (1) TMI 227 - HC - Income Tax

Interest on FDRs - Whether Tribunal has failed to adjudicate the issue in treating the interest on FDRs income under the head income from other sources and allowed the corresponding deduction of interest expenses under section 36(1)(iii) instead under section 57(iii) - Held that - The FDRs were kept in the bank as margin money of obtaining loans. In support of the connection of the interest paid on loan with the FDRs in question the assessee has enclosed the relevant account statements details of interest paid etc. before the Assessing Officer and the Assessing Officer has not negated the connection between the interest paid on loan and FDRs. The only difficulty made out by the Assessing Officer to deny deduction claimed under section 57(iii) was that in view of the voluminous details interest paid to ICICI and IDBI for the funds utilized for the FDRs cannot be exactly determined. Therefore considered in this light and especially in view of the fact situation that there was no material has been referred to by the CIT(Appeals) to hold that the interest expenditure has not been expended for the impugned FDR we do not find any weight in the aforesaid conclusion by the CIT(Appeals). As a consequence it has to be held that the interest paid to ICICI and IDBI band on funds utilized to make the impugned FDRs is an allowable deduction under section 57(iii) against the interest income on such FDRs. Thus the claim of the assessee under section 57(iii) of the Act on account of interest expenditure amounting to Rs. 11, 56 764/- being more than the amount of interest assessable under the had income from other sources there remains a loss of Rs. 1, 44, 240/- assessable under the head income from other sources . - Decided against revenue

Summary

Issues:
- Interpretation of provisions under the Income Tax Act, 1961 regarding treatment of interest on Fixed Deposit Receipts (FDRs) as income from other sources.
- Determination of allowable deductions under section 57(iii) of the Act for interest expenses incurred in earning income from other sources.

Analysis:

Issue 1: Interpretation of provisions under the Income Tax Act, 1961 regarding treatment of interest on Fixed Deposit Receipts (FDRs) as income from other sources.

The appeal before the High Court involved a dispute regarding the treatment of interest income on FDRs under the head 'income from other sources' and the corresponding deduction of interest expenses under section 36(1)(iii) or section 57(iii) of the Income Tax Act. The Tribunal held that the interest paid to banks on funds utilized for FDRs was an allowable deduction under section 57(iii) against the interest income on such FDRs. The Tribunal relied on the decision in CIT vs. Karnal Cooperative Sugar Mills Limited to support its conclusion. The High Court upheld the Tribunal's decision, emphasizing that once income is deemed taxable under 'income from other sources,' any expenses incurred for earning that income would fall under section 57(iii) of the Act.

Issue 2: Determination of allowable deductions under section 57(iii) of the Act for interest expenses incurred in earning income from other sources.

The High Court analyzed the facts of the case where the assessee had incurred interest expenditure on funds utilized to make FDRs, which generated interest income. The Tribunal found that the interest paid on loans from banks, utilized for purchasing the FDRs, was directly connected to the income earned under 'income from other sources.' The Tribunal highlighted that the interest expenses were incurred for earning the interest income, making them eligible for deduction under section 57(iii) of the Act. The High Court agreed with the Tribunal's findings, stating that the revenue failed to demonstrate any error or perversity in the Tribunal's decision. Consequently, the High Court dismissed the appeal by the revenue, affirming the Tribunal's ruling on the allowable deductions under section 57(iii) for interest expenses related to income from other sources.

In conclusion, the High Court's judgment clarified the interpretation of provisions under the Income Tax Act regarding the treatment of interest income on FDRs and the eligibility for deductions under section 57(iii) for interest expenses incurred in earning income from other sources.