2009 (11) TMI 562 - HC - Income Tax

Income from other sources Deduction Interest on borrowed capital Held that it is very clear that the assessee had not borrowed any funds for making deposit with the same bank for the purpose of earning interest. Since no amount is borrowed from the bank for making deposit, the claim of deduction of interest paid on borrowed funds in the computation of income from other sources under section 57(iii) of the Income-tax Act is not tenable. It is obvious from the provision of 57(iii) that unless funds are borrowed for making the deposit to earn interest, such interest paid on borrowed funds cannot be allowed as deduction in the computation of income from other sources which in this case is interest earned on deposit. From the facts stated above, there can be no doubt that funds transferred from cash credit/packing credit are nothing but the assessee s amount credited in such account and not borrowed funds converted to deposit account by the assessee. - Decided in favor of revenue.

Summary

Issues:
Whether the Tribunal was justified in granting deduction of estimated amount of expenditure against interest income received by the assessee during the previous year on term deposits.

Analysis:
The case involved the question of whether the Tribunal was correct in allowing a deduction of estimated expenditure against interest income received by the assessee on term deposits. The assessee, engaged in textile manufacturing and export, received interest on term deposits but claimed a deduction under section 57(iii) of the Income-tax Act for interest paid to the bank as borrowings. The Assessing Officer disallowed the claim, stating that the entire interest paid to the bank was on funds borrowed for business purposes and could not be bifurcated for deposit interest. The Tribunal allowed only two-thirds of the claim, leading to the Department's appeal.

The Tribunal's decision was based on the assessee's claim that the deposits earning interest were made from borrowed funds transferred from the cash credit account. However, the bank's certificate clarified that no funds were borrowed for making term deposits. The court noted that if the claim was genuine, the result would be a negative figure due to higher interest on borrowings than on deposits. The court further analyzed whether the assessee was entitled to deduction under section 57(iii) against interest income on term deposits, emphasizing that funds must be borrowed for making the deposit to earn interest.

The court concluded that as the funds transferred to term deposits were from the assessee's account and not borrowed funds, there was no justification for allowing any deduction of estimated interest under section 57(iii) against interest income. The Assessing Officer's decision to allow the entire interest charged by the bank against business income was upheld, as the cash credit/packing credit account was maintained for business purposes. The court allowed the appeal, reversing the Tribunal and Commissioner of Income-tax (Appeals) orders and restoring the assessment.