2008 (1) TMI 53 - HC - Income Tax

Loan from bank pledging fixed assets interest earned on assets was treated as business income, accepted by AO held that interest earned from fixed deposits could be adjusted against the interest paid by assessee on the loan, as both have direct nexus with each other

Summary

Issues:
1. Whether the assessee is entitled to reduce the interest paid on a loan by adjusting the interest received on fixed deposits pledged with the bank?
2. Whether the deduction claimed by the assessee on the interest from fixed deposits can be adjusted against the interest paid to the bank under Explanation (baa) to 80HHC of the Income-tax Act, 1961?

Issue 1:
The court examined whether the assessee could reduce the interest paid on a loan by adjusting the interest received on fixed deposits pledged with the bank. The court referred to a previous decision and categorized fixed deposits into two types: those for parking surplus funds and those for availing credit facilities for export business. It was established that interest earned on fixed deposits should be treated as income from other sources, not business income. However, if the Assessing Officer specifically treats the interest income as business income and it remains unchallenged, the classification will not be revisited. In the present case, the assessee had taken fixed deposits to avail credit facilities and claimed the interest earned as business income, which was accepted by the Assessing Officer. Therefore, the court concluded that the interest earned on fixed deposits pledged with the bank should be treated as business income based on the assessment order.

Issue 2:
Regarding the deduction claimed by the assessee on the interest from fixed deposits against the interest paid to the bank, the court analyzed the nexus between obtaining the loan and paying interest to earn interest on the fixed deposits. The court emphasized the need to establish a clear nexus for the deduction to be permissible under Explanation (baa) to 80HHC of the Income-tax Act, 1961. It was determined that the nexus issue is a question of fact to be decided by the lower authorities. The Revenue argued for the matter to be remanded to the Assessing Officer for establishing the nexus. However, the court disagreed with this view based on the Tribunal's findings. The Tribunal had concluded that the fixed deposits pledged by the assessee were part of business assets, and the interest earned had a direct nexus with the interest paid. As these factual conclusions were not disputed before the Tribunal, the court upheld the Tribunal's decision, stating that no substantial question of law arose for consideration, and consequently dismissed the appeal.