2017 (8) TMI 121 - HC - Income Tax

Netting of the interest paid and the interest received - not setting off the same but taxing the gross receipts - business unit closed - Held that - The factual matrix reveals that the company was closed on December 2, 1983. It is undisputed that no business was being carried out, the interest accrued cannot be termed as business expenditure and the interest which was paid was in the course of winding up of the company. In view of the fact that the claim of secured creditors against the claim of the workers under section 529 of the Companies Act, 1956, will not take precedence, the fixed deposit receipt was got made. Taking into consideration the fact, the interest income is to be reckoned as income from other sources. The netting of the interest paid and the interest received is not permissible. Section 57(iii) of the Income-tax Act also does not help the assessee, in peculiar facts of the case, the assessee cannot be heard to say that it has spent ₹ 5,33,23,380 for earning interest of ₹ 59,31,141 on the fixed deposit receipt . Hence, the view taken by the Tribunal is just and proper - Decided against assessee.

Summary

Issues:
1. Assessment of interest receipts against interest expenditure.
2. Validity of directions to adjust unabsorbed depreciation against profit.

Issue 1: Assessment of interest receipts against interest expenditure

The appellant challenged the Tribunal's decision allowing the Revenue's appeal. The appellant contended that the interest earned on fixed deposits should be set off against interest payable to the secured creditor, State Bank of India. The company was wound up, and the official liquidator allowed the secured creditor's claim. The appellant argued that the interest earned on fixed deposits should be set off against interest payable, but the Income-tax Officer initially disallowed this set off. The Commissioner of Income-tax later allowed the set off, which the Tribunal reversed. The appellant relied on legal provisions and a Supreme Court judgment to support their position. The court observed that the interest income was not related to business expenditure, and as the company was closed, the interest income was to be considered as income from other sources. The court referred to a Kerala High Court judgment to support its decision. Ultimately, the court held that netting off interest paid and received was not permissible, and the view taken by the Tribunal was correct, considering the specific circumstances of the case.

Issue 2: Validity of directions to adjust unabsorbed depreciation against profit

The counsel for the appellant did not press issue 2 during the proceedings. Therefore, the court did not delve into the validity of the directions to adjust unabsorbed depreciation against profit, as raised by the appellant's counsel. Consequently, the court only considered and addressed issue 1 during the hearing.

In conclusion, the High Court of Rajasthan dismissed the appeal, ruling in favor of the Department and against the appellant. The court found that the interest receipts should not be set off against interest expenditure, as the specific circumstances of the case did not warrant such netting off. The judgment provided a detailed analysis of the legal provisions, previous judgments, and the factual background of the case to support its decision.