M/S Jaipur Spinning & Weaving Mills Ltd v. The Deputy Commissioner Of Income Tax, Jaipur

HIGH COURT OF JUDICATURE FOR RAJASTHAN BENCH ATJAIPUR D.B. Income Tax Appeal No. 104 / 2004 M/S Jaipur Spinning & Weaving Mills Ltd. Versus The Deputy Commissioner of Income Tax, Jaipur ----Appellant ----Respondent _____________________________________________________ For Appellant(s) : Mr. Gaurav Sharma For Respondent(s) : Mr. K.D. Mathur for Mr. R.B. Mathur _____________________________________________________ HON'BLE MR. JUSTICE K.S. JHAVERI HON'BLE MR. JUSTICE VINIT KUMAR MATHURJudgment 10/01/2017 1.By way of this appeal, the assessee has challenged thejudgment and order of the Tribunal whereby the Tribunal hasallowed the appeal of the revenue. 2.This Court while admitting the appeal framed the followingsubstantial questions of law vide order dated 8.9.2004:- “Whether on the facts and in totality of circumstances,fixed deposits having been made which were charged infavour of the secured creditor, SBI and the fixed depositswere also with SBL, the learned Tribunal was right in lawin not netting the interest receipts against interestexpenditure and in not setting off the same but taxingthe gross receipts of Rs.59,31,141/-? Whether the directions contained in para 52 to adjustthe amount of unabsorbed depreciation of earlier tenyears against such profit or short term capital gain onsale of such assets and then find out the remainder, ifany, and allow such remainder during the assessment year 1993-94 are not without jurisdiction and invalid inlaw?” 3.Counsel for the appellant mainly contended that thefacts of the matter are that the winding up order came to bepassed on 2.12.1983. State Bank of India, the securedcreditor's claim of Rs.660.29 lacs was allowed by O.L. videorder dated 25.02.1988. Company Court directed to disposeof the property of the company which came to be disposedof and sale realization from auction of company's assets,having charge of SBI was Rs. 5,76,93,728/-. 4.Since, there were two claims of unsecured creditor's,out of the sale proceeds, a sum of Rs. 5,75,80,000/- wasdeposited in the fixed deposit with bank. On 29.3.1994,company court ordered to withdraw 50% F.D. amount fordisbursement. However, the company has earned interest ofRs. 59,31,141/- on the Fixed Deposit and interest has alsoaccrued on the loan of the secured creditor's of SBI to thetune of Rs.5,33,23,380/- on the unpaid admitted loanamount. On 23.2.1996 pursuant to the return for theassessment year 1993-94, an order came to be passed byITO. The I.T.O. has not allowed the set off of the interestearned (Rs.59,31,141/-) against interest payable. HoweverCIT in appeal allowed the set off of the interest gainedagainst interest payable vide order dated 19.3.1996, but thetribunal has reversed the same on the ground that CITordered set off of the interest gained against interest payablewas not permissible. The Tribunal, however, allowed the claim of setting off of unabsorbed depreciation as against theinterest income. 5.Counsel for the appellant has contended that in view ofRule 179 of the Company's Court Rules, 1959 and Section 57of the Income Tax Act, 1961 and also Rule 293, 296, 297and Rule 470 of the Rules, the view taken by the tribunal iscontrary to the decision of the Supreme Court in M/s. VijayaLaxmi Sugar Mills Ltd vs Commissioner Of Income Taxreported in (1991) ITR (SC)641 wherein in para no.10, it hasbeen held as under:- claim of setting off of unabsorbed depreciation as against theinterest income. 5.Counsel for the appellant has contended that in view ofRule 179 of the Company's Court Rules, 1959 and Section 57of the Income Tax Act, 1961 and also Rule 293, 296, 297and Rule 470 of the Rules, the view taken by the tribunal iscontrary to the decision of the Supreme Court in M/s. VijayaLaxmi Sugar Mills Ltd vs Commissioner Of Income Taxreported in (1991) ITR (SC)641 wherein in para no.10, it hasbeen held as under:- “The next submission of the learned counsel for theassesee was that in the course of effecting the windingup of the assessee company the Liquidator has beenincurring expenses such as salaries, legal fees,travelling expenses and other liquidation expenses andthat these expenses are allowable deduction fromincome earned by way of interest from fixed deposits inthe relevant year. In computing the income chargeableunder the head "Income From Other Sources", section57(iii)provides that deduction is to be made in respectof expenditure laid out or expended wholly andexclusively for the purpose of making or earning suchincome. The question for consideration, therefore, iswheth- er the expenses of the type incurred by theLiquidator in this case can be said to have beenincurred solely for the purpose of earning the interestincome. It is true that the connection between theexpenditure and the earning of income need not bedirect and it may be indirect. But since the expendituremust have been incurred for the purpose of earningthat income there should be some nexus between theexpenditure and the earning of the income. There is noteven some sort of an evidence to show that theexpenses incurred by the Liquidator was to facilitate theearning or at least for protecting of the income. Theinterest accrues SUI GENERIS. The interest is payableby the bank whether it is claimed or not and whetherthere is any establishment or not. Normally there wasno necessity for spending anything separately forearning the interest. However we may hasten to addthat if any explenditure was incurred like commissionfor collection or such similar expenditures which maybe considered as spent solely for the purpose of earning that income, the position may be different. Butthat was not so in this case. It could not also be saidthat the expenditure incurred was to preserve oracquire the asset. Nor could it be said that theexpenses were incurred for the purpose of maintenanceof the source. The requirement under section 57(iii)that the expenditure should have been incurred "for thepurpose of making or earning such income" show thatthe object of spending or the end or aim or theintention of such spending was for earning the interestincome. There could be no doubt that the expenditureincurr- eid by the Liquidator in this case can by nostretch be said to have been incurred with the object orfor the purpose of earning the interest income. TheTribunal was, therefore, right in holding that theexpenses claimed are not related to the interest incomeand was not a deductable expenditure under section57.” 5.1Another judgment of Supreme Court in Chandipore Fisheries Pvt. Ltd. vs. Commissioner of Income Tax reported in 1992 ITR565 in para no.15, holding as under:- 5.1Another judgment of Supreme Court in Chandipore Fisheries Pvt. Ltd. vs. Commissioner of Income Tax reported in 1992 ITR565 in para no.15, holding as under:- “On a careful consideration of the facts andcircumstances of this case, we are of the view that thefixed deposit receipts had, in fact, been made over tothe shareholders and the resolution for the distributionof the proceeds of the said fixed deposit receipts wereduly passed and that intimation was also furnished tothe bank concerned about the transfer. On aconstruction of the letters written by the liquidator tothe Manager, United Bank of India, and the certificatesgiven by him to which reference has already beenmade, it is evident that the fixed deposit receipts weretransferred in favour of the shareholders who alone areentitled to receive the interest. As a matter of fact, theterm deposit receipts were physically handed over todifferent shareholders who alone were entitled to theinterest thereon. If that be the position, it cannot besaid that the interest on the fixed deposits would stillremain the income of the company in liquidation. In anyevent, the company in liquidation was merely a trusteefor the shareholders to whom the fixed deposit receiptshad been transferred and the interest income would beassessable only as income of the beneficiaries and notas that of the trustee.” 6.Mr. Mathur has taken us to the order of AO and contended that in view of the findings of the AO, the depreciation which was not carried forward cannot be considered as a businessexpenditure as the unit was closed, and hence deduction thereofcannot be allowed from the interest income as provided underSection 57(iii) of the Act of 1961. 7.In light of the above submissions, issue no.2 is not pressedby the counsel for the appellant. 8.In view of the above observations, only the issue no.1 isconsidered. 9.We have heard counsel for the parties. 10.The factual matrix reveals that the company was closed on2.12.1983 it is undisputed that no business was being carried out,the interest accrued cannot be termed as business expenditureand the interest which was paid was in the course of winding up ofthe company. In view of the fact that the claim of securedcreditors against the claim of the workers under Section 529 ofthe Companies Act 1956 will not take precedence, the FDR wasgot made. Taking into consideration the fact, the interest incomeis to be reckoned as income from other source. 11.Mr. Mathur has relied on the judgment of the Kerala HighCourt in Commissioner of Income Tax vs. Vaikundam Rubber Co.Ltd. reported in (2002) 253 ITR 417 wherein it has been held asunder:- “The relevant assessment year is 1981-82. Theassessee had a fixed deposit of Rs. 22.85 lakhs with abank. Subsequently, the assessee borrowed a sum ofRs. 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 byassessee had a fixed deposit of Rs. 22.85 lakhs with abank. Subsequently, the assessee borrowed a sum ofRs. 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 11.Mr. Mathur has relied on the judgment of the Kerala HighCourt in Commissioner of Income Tax vs. Vaikundam Rubber Co.Ltd. reported in (2002) 253 ITR 417 wherein it has been held asunder:- “The relevant assessment year is 1981-82. Theassessee had a fixed deposit of Rs. 22.85 lakhs with abank. Subsequently, the assessee borrowed a sum ofRs. 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 byassessee had a fixed deposit of Rs. 22.85 lakhs with abank. Subsequently, the assessee borrowed a sum ofRs. 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 thefixed deposit, which was reduced by Rs. 84,654 whichthe bank recovered from the assessee as interest onthe loan amount of Rs. 7.50 lakhs. The assesseeclaimed the deduction of the interest of Rs. 84,654from the interest amount of Rs. 2,31,247 receivable byit on the fixed deposit. The Assessing Officer did notallow the claim, but added the entire interest receivedon the fixed deposit as income from other sources. Onappeal by the assessee, the Commissioner of Income-tax (Appeals) held that it would not be appropriate toignore the assessee's claim for deduction of Rs. 84,654since the interest was taken away by the bank asconsideration for the facilities extended by it to theassessee. On further appeal by the Revenue, theIncome-tax Appellate Tribunal held that the interest atthe rate of 2 per cent, in excess of the interest payableon the fixed deposit by the bank was paid by theassessee on the borrowals made by it for businesspurposes and so the interest on the borrowal made bythe assessee against the fixed deposit made by theassessee with the bank was an allowable deductionunderSection 57(iii)as it is an expenditure laid out oran amount expended wholly and exclusively for thepurpose of making or earning the income of theassessee. It is arising out of that decision of theTribunal that the question referred to above wasreferred for the opinion of this court under Section256(2)of the Income-tax Act. We also find that the earlier view adopted by this courtinCIT v. Dr. V. P. Gopinathan [1998] 229 ITR 801 wasreversed by the Supreme Court in GT v. Dr. V. P.Gopinathan [2001] 248 ITR 449, wherein the SupremeCourt held that the interest that the assessee receivedfrom the bank on the fixed deposit was income in hishands and it could stand diminished only if there was aprovision in law permitting such diminution. There wasno such provision of law and the interest on the loantaken from the bank did not reduce his income by wayof interest on the fixed deposit. We find that the ratio ofthe decision of the Supreme Court also squarely coversthe question referred for our opinion.” 12.In that view of the matter, we are of the opinion that the netting of the interest paid and the interest received is notpermissible. Section 57(iii) of the Income Tax Act also does nothelp the assessee, in peculiar facts of the case, the assesseecannot be heard to say that it has spent Rs.5,33,23,380/- for earning interest of Rs.59,31,141/- on the FDR. Hence, the viewtaken by the tribunal is just and proper and more particularly inthe light of observations made by the Supreme Court in parano.10. 13.In that view of the matter, the issue is answered in favour ofthe Department and against the assessee. 14.The appeal stands dismissed. (VINIT KUMAR MATHUR)J. (K.S. JHAVERI)J. Brijesh 23.