COMMISSIONER OF INCOME TAX Vs. DHANALAKSHMI WEAVING WORKS

JUDGEMENT

(1.) The question raised is 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.

(2.) We have heard the senior standing counsel appearing for the revenue and advocate Sri T.M. Sreedharan appearing for the Respondent-Assessee.

(3.) The Assessee is engaged in manufacture and export of textiles. During the previous year relevant to the assessment year 2001-02, the Assessee received an amount of Rs. 69,87,702 towards interest on various term deposits. However, the Assessee did not offer the entire income 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 the Income Tax Act towards interest paid to the bank as borrowals. The assessing officer held that the entire interest paid by the Assessee to the bank was Rs. 1,00,60,390 which was on funds borrowed for business purpose and it was not justified on the part of the Assessee to bifurcate part of the funds as borrowed for deposit with the same bank for earning interest and to apportion the total interest liability on a proportionate basis. The assessing officer disallowed the claim of deduction of interest under Section 57(iii), but allowed the entire interest paid on borrowing as deduction against business income. Even though the Assessees claim was allowed in appeal, in second appeal by the department, the Tribunal allowed only 2/3 of the claim and disallowed 1/3. It is against this order of the Tribunal, the department has filed this appeal. The Assessees claim is that the deposits which earned interest are made by transferring funds from the cash credit account, upon request by the Assessee. Since cash credit account again is loan amount, Assessees case is that deposits are made from out of borrowed funds and, so much so, interest paid on borrowals should be allowed to be set off against interest earned on deposits. In other words, the strange and unusual claim is that the Assessee borrows funds at a higher rate of interest for making deposit with the same bank at much lower rate of interest. However, the certificate issued by the bank in para 5 states as follows: