Ita/831/2009 Of Commissioner Of Income Tax, Kannur v. Dhanalakshmi Weaving Works, Kakkad, Kann

IN THE HIGH COURT OF KERALA AT ERNAKULAM PRESENT : THE HONOURABLE MR. JUSTICE C.N.RAMACHANDRAN NAIR & THE HONOURABLE MR. JUSTICE V.K.MOHANAN MONDAY, THE 16TH NOVEMBER 2009 / 25TH KARTHIKA 1931 ITA.No. 831 of 2009() --------------------- ITA.491/2005 of I.T.A.TRIBUNAL,COCHIN BENCH .................... APPELLANT/APPELLANT --------------------------------------- THE COMMISSIONER OF INCOME TAX, KANNUR. BY ADV. SRI.P.K.R.MENON,SR.COUNSEL, GOI(TAXES) SRI.JOSE JOSEPH, SC, FOR INCOME TAX RESPONDENT: RESPONDENT ------------------------- M/S.DHANALAKSHMI WEAVING WORKS, KAKKAD, KANNUR. BY ADV. SRI.T.M.SREEDHARAN SMT.C.K.SHERIN & SRI.V.P.NARAYANAN THIS INCOME TAX APPEAL HAVING BEEN FINALLY HEARD ON 16/11/2009, THE COURT ON THE SAME DAY DELIVERED THE FOLLOWING: (C.R) C.N. RAMACHANDRAN NAIR &V.K.MOHANAN, JJ. ---------------------------------------- I.T.A. No.831 OF 2009 ---------------------------------------- Dated, the 16th day of November, 2009 JUDGMENT Ramachandran Nair, J. The question raised is whether the Tribunal wasjustified in granting deduction of estimated amount ofexpenditure against interest income received by theassessee during the previous year on term deposits. 2. We have heard the senior Standing Counselappearing for the Revenue and Adv.Sri T.M.Sreedharanappearing for the respondent-assessee. 3. The assessee is engaged in manufacture andexport of textiles. During the previous year relevant to theassessment year 2001-2002, the assessee received anamount of Rs.69,87,702/- towards interest on various termdeposits. However, the assessee did not offer the entireincome for the purpose of levy of tax under the head'income from other sources'. The assessee claimed deductions of Rs.31,80,176/- under Section 57(iii) of theI.T.Act towards interest paid to the bank as borrowals. TheAssessing officer held that the entire interest paid by theassessee to the bank was Rs.1,00,60,390/- which was onfunds borrowed for business purpose and it was not justifiedon the part of the assessee to bifurcate part of the funds asborrowed for deposit with the same bank for earning interestand to apportion the total interest liability on a proportionatebasis. The Assessing Officer disallowed the claim ofdeduction of interest under section 57(iii), but allowed theentire interest paid on borrowing as deduction againstbusiness income. Even though the assessee's claim wasallowed in appeal, in second appeal by the department, theTribunal allowed only 2/3 of the claim and disallowed 1/3. Itis against this order of the Tribunal, the Department hasfiled this appeal. The assessee's claim is that the depositswhich earned interest are made by transferring funds fromthe cash credit account, upon request by the assessee.Since cash credit account again is loan amount, assessee's case is that deposits are made from out of borrowed fundsand, so much so, interest paid on borrowals should beallowed to be set off against interest earned on deposits. In other words, the strange and unusual claim is that theassessee borrows funds at a higher rate of interest formaking deposit with the same bank at much lower rate ofinterest. However, the certificate issued by the bank in para 5 states as follows: “We have extended the credit facility asexport packing credit to procure raw materials toexecute export orders. We have not granted anyadvances to the customer for the specific purposeof making term deposit”. case is that deposits are made from out of borrowed fundsand, so much so, interest paid on borrowals should beallowed to be set off against interest earned on deposits. In other words, the strange and unusual claim is that theassessee borrows funds at a higher rate of interest formaking deposit with the same bank at much lower rate ofinterest. However, the certificate issued by the bank in para 5 states as follows: “We have extended the credit facility asexport packing credit to procure raw materials toexecute export orders. We have not granted anyadvances to the customer for the specific purposeof making term deposit”. From the above, it is very clear that the assessee had notborrowed any funds for making deposit with the same bankfor the purpose of earning interest. Since no amount isborrowed from the bank for making deposit, the claim ofdeduction of interest paid on borrowed funds in thecomputation of income from other sources under section 57(iii) of the IT Act is not tenable. In fact, if assessee's claim isgenuine, then the net result should be a negative figure because borrowed funds attract higher rate of interest thanthe rate of interest received on deposit. 4. The next aspect to be considered is whether theassessee will be entitled to deduction of interest undersection 57(iii) of the Act against interest income received onterm deposit merely because deposits are made bytransferring funds from cash credit account/packing creditaccount. From the bank's letter, what is clear is that afterborrowing funds through withdrawal from cash credit/packingcredit account, the assessee utilised the borrowed fundsfor purchase of raw materials, processing etc. Exportproceeds are credited in the cash credit account, therebyreducing the loan amount and it may so happen that suchcredits may lead to surplus in the account. In our view, whenthe assessee requests the bank to transfer various amountsto fixed deposit account for retaining as term deposits,invariably, such transfers are not from borrowed funds butfrom export proceeds credited in the packing credit account.It is immaterial whether at the time of transfer, there is credit balance or debit balance because it is up to the assessee toreckon pending bills and to request the bank to transfer fromout of cash credit account/packing credit account to depositaccount. However, this transaction should not be taken as aloan availed by the assessee from the bank to make thedeposit. Section 57(iii) provides for deduction of expenditurein the computation of income as follows: “(iii) any other expenditure (not being in thenature of capital expenditure) laid out or expendedwholly and exclusively for the purpose of making orearning such income”. It is obvious from the above provision that unless funds areborrowed for making the deposit to earn interest, such interestpaid on borrowed funds cannot be allowed as deduction in thecomputation of income from other sources which in this caseis interest earned on deposit. From the facts stated above,there can be no doubt that funds transferred from cashcredit/packing credit is nothing but assessee's amountcredited in such account and not borrowed funds convertedto deposit account by assessee. Therefore in our view, there ITA No.831/09 “(iii) any other expenditure (not being in thenature of capital expenditure) laid out or expendedwholly and exclusively for the purpose of making orearning such income”. It is obvious from the above provision that unless funds areborrowed for making the deposit to earn interest, such interestpaid on borrowed funds cannot be allowed as deduction in thecomputation of income from other sources which in this caseis interest earned on deposit. From the facts stated above,there can be no doubt that funds transferred from cashcredit/packing credit is nothing but assessee's amountcredited in such account and not borrowed funds convertedto deposit account by assessee. Therefore in our view, there ITA No.831/09 is no justification for the first appellate authority or theTribunal to allow any deduction of estimated interest undersection 57(iii) in the computation of interest income under thehead 'income from other sources'. In our view, theAssessing Officer has rightly allowed the entire interestcharged by the bank against income from business becausecash credit/packing credit account maintained is for businesspurpose and the entire interest charged should be debitedagainst business income. We therefore allow the appeal byreversing the orders of the Tribunal and C.I.T(A) and byrestoring the assessment. C.N.RAMACHANDRAN NAIR JUDGE V.K.MOHANAN, JUDGE kvm/- ITA No.831/09 -:7:- V.K.MOHANAN, J. O.P.No. JUDGMENT Dated:..