2007 (6) TMI 147 - HC - Income Tax

Income from other sources HC held that no separate deduction is possible in respect interest on borrowing under Income from other sources on the ground of the assessee had already been debited the expenditure on account of interest to the profit and loss account

Summary

Issues: Appeal under Section 260A of the Income Tax Act, 1961 regarding the disallowance of interest payment under Sec.57 of the Income-tax Act.

Detailed Analysis:

1. Background and Facts: The case involved a Private Limited Company engaged in software manufacturing and export. The assessment year was 2001-2002, and the company filed a return declaring "Nil" income, which was later scrutinized and reopened. The Assessing Officer rejected the claim that interest paid had a direct relation with interest received, leading to the dispute.

2. Contentions: The counsel for the assessee argued that the funds borrowed were invested in bank accounts, and as per the real income theory, only the net income should be taxable. The counsel further contended that expenses to earn income from other sources should have been allowed as per the real income theory.

3. Assessment and Exemption Claim: The company claimed the entire income as exempt under Section 10B of the Act. The Assessing Officer proposed to assess the interest on bank deposits as income under "Other Sources" and rejected the company's method of computation.

4. Interest Payment Dispute: The company had obtained a loan and immediately invested it in bank deposits. The interest paid on the loans was sought to be deducted from the interest received from the bank deposits. The company argued that the expenditure should be allowed as a deduction from interest income due to the direct relation between interest paid and received.

5. Tribunal's Decision: The Tribunal upheld the Assessing Officer's order, stating that since the expenditure on interest had already been debited in the Profit and Loss Account, no separate deduction was permissible. The Tribunal's decision was based on valid evidence, and it was deemed improper for the company to claim the interest income again under "income from other sources."

6. Court's Decision: The High Court dismissed the appeal, stating that the Tribunal's order was in accordance with the law and did not warrant interference. The Court held that no substantial question of law arose for consideration, and thus, the tax case was dismissed without costs.

In conclusion, the High Court upheld the Tribunal's decision, emphasizing that the interest expenditure had already been accounted for in the Profit and Loss Account, and no separate deduction was permissible.