Commissioner of Income Tax vs Vaikundam Rubber Co. Ltd.

P.K. Balasubramanyan, J.—At the instance of the Revenue, the following question has been referred for the opinion of this court:

"Whether, on the facts and in the circumstances of the case, interest on the borrowal made by the assessee against the fixed deposit made by the assessee with the bank is an allowable deduction u/s 57(iii) of the Income Tax Act, 1961 ?"

The relevant assessment year is 1981-82. The assessee had a fixed deposit of Rs. 22.85 lakhs with a bank. Subsequently, the assessee borrowed a sum of Rs. 7.50 lakhs from that bank against the fixed deposit. The assessee had the liability to pay interest thereon, which was 2 per cent, higher than the interest paid by the bank on the fixed deposit, hi the year of account, the assessee received Rs. 2,31,247 as interest from the fixed deposit, which was reduced by Rs. 84,654 which the bank recovered from the assessee as interest on the loan amount of Rs. 7.50 lakhs. The assessee claimed the deduction of the interest of Rs. 84,654 from the interest amount of Rs. 2,31,247 receivable by it on the fixed deposit. The Assessing Officer did not allow the claim, but added the entire interest received on the fixed deposit as income from other sources. On appeal by the assessee, the Commissioner of Income Tax (Appeals) held that it would not be appropriate to ignore the assessee''s claim for deduction of Rs. 84,654 since the interest was taken away by the bank as consideration for the facilities extended by it to the assessee. On further appeal by the Revenue, the Income Tax Appellate Tribunal held that the interest at the rate of 2 per cent, in excess of the interest payable on the fixed deposit by the bank was paid by the assessee on the borrowals made by it for business purposes and so the interest on the borrowal made by the assessee against the fixed deposit made by the assessee with the bank was an allowable deduction u/s 57(iii) as it is an expenditure laid out or an amount expended wholly and exclusively for the purpose of making or earning the income of the assessee. It is arising out of that decision of the Tribunal that the question referred to above was referred for the opinion of this court u/s 256(2) of the Income Tax Act.

We find that the position is now covered by the decision of this court in Commissioner of Income Tax Vs. Vaikundam Rubber Co. Ltd., (the same assessee). Therein, this court has held that any set off or deduction of any expenditure can only be made in accordance with the provisions of the Income Tax Act and the interest paid on borrowals was not an allowable deduction u/s 57 of the Income Tax Act. Thus the question was answered against the assessee and in favour of the Revenue.

We also find that the earlier view adopted by this court in Commissioner of Income Tax Vs. Dr. V.P. Gopinathan, was reversed by the Supreme Court in Commissioner of Income Tax Vs. V.P. Gopinathan, , wherein the Supreme Court held that the interest that the assessee received from the bank on the fixed deposit was income in his hands and it could stand diminished only if there was a provision in law permitting such diminution. There was no such provision of law and the interest on the loan taken from the bank did not reduce his income by way of interest on the fixed deposit. We find that the ratio of the decision of the Supreme Court also squarely covers the question referred for our opinion.

In the light of the two decisions referred to above, we answer the question referred to us in favour of the Revenue and against the assessee.