1987 (8) TMI 145 - AT - Income Tax

Summary

Issues:
1. Whether the interest paid on borrowings can be set off against the interest earned from Fixed Deposit Receipts (FDRs) for income tax purposes.
2. Interpretation of Section 57(iii) of the Income-tax Act, 1961 regarding the deductibility of expenditure incurred to earn income.

Detailed Analysis:

Issue 1:
The appellant, an individual, earned income from salary and interest from various sources, including FDRs. The appellant set off the interest paid on borrowings against the interest earned from FDRs. The Income Tax Officer (ITO) and the Appellate Authority confirmed the disallowance of this claim. The appellant argued that a similar claim was accepted by the Tribunal for a previous assessment year. The Revenue contended that the interest paid on borrowings was not directly related to earning the interest income from FDRs. The Tribunal considered various legal precedents and held that there was no correlation between the purpose of the expenditure (interest paid on borrowings) and the income earned from FDRs. The Tribunal referred to case law where interest paid on borrowings for personal expenses was not allowed as a business expenditure under Section 57(iii).

Issue 2:
The Tribunal analyzed the applicability of Section 57(iii) of the Income-tax Act, 1961, which allows deduction of expenditure laid out wholly and exclusively for the purpose of making or earning income. Citing the judgment in CIT v. Rajendra Prasad Moody, the Tribunal emphasized that the purpose of the expenditure must be related to earning income, regardless of whether income is actually earned. The Tribunal concluded that the interest paid on borrowings was not incurred to earn the income from FDRs but was used to provide funds to the family. The Tribunal rejected the appellant's claim for deduction based on the legal principle that expenditure unrelated to the purpose of earning income cannot be allowed as a deduction under Section 57(iii).

In summary, the Tribunal dismissed the appeal, holding that the interest paid on borrowings cannot be set off against the interest earned from FDRs for income tax purposes. The decision was based on the lack of correlation between the purpose of the expenditure and the income earned, as required by Section 57(iii) of the Income-tax Act, 1961.