M/S JAIPUR SPINNING and WEAVING V. DEPUTY COMMISSIONER OF INCOME

ITA/103/2003

AI Insights

The case revolves around the financial dealings of M/s. Jaipur Spinning & Weaving Mills Ltd. during its winding up process, particularly concerning the treatment of interest income from fixed deposits and interest expenditure on loans from the State Bank of India (SBI). The Income Tax Appellate Tribunal had earlier reversed the decision of the Commissioner of Income-tax (Appeals), which had allowed the set off of interest income against interest expenditure. The Tribunal's decision was contested in the High Court, which framed substantial questions of law regarding the netting of these interest amounts and the jurisdiction to adjust unabsorbed depreciation against such income.

• Counselvise Citation: [2016] 140 COUNSELVISE.COM (IT) 726252 (HC-RAJASTHAN)
• Appeal Type: Others
• Pronouncement Date: 06-12-2016
• Assessment Year: misc
• Other Referred Cases: M/s. Vijaya Laxmi Sugar Mills Ltd vs Commissioner Of Income Tax, Chandipore Fisheries Pvt. Ltd. vs. Commissioner of Income Tax, Commissioner of Income Tax vs. Vaikundam Rubber Co. Ltd.
• Laws Referred To: Income Tax Act, 1961, Companies Act, 1956
• Result in Favour of: Revenue
• Court: HIGH COURT
• Department Lawyers: R B MATHUR
• Assessee Lawyers: GAURAV SHARMA
• Keywords: Fixed Deposit; Income tax appeal; Interest income; Secured creditor; Unabsorbed depreciation; Unsecured creditor; Winding up
• Section: 57(iii)

Judgement Text

"1 IN THE HIGH COURT OF JUDICATURE FOR RAJASTHAN BENCH AT JAIPUR. D.B. Income Tax Appeal No.103/2003 M/s. Jaipur Spinning & Weaving Mills Ltd. Vs. The Deputy Commissioner of Income Tax, Jaipur DATE OF ORDER ::: 6.12.2016 HON'BLE MR. JUSTICE K.S. JHAVERI HON'BLE MR. JUSTICE DINESH MEHTA Mr. Gaurav Sharma, for the appellant. Mr. R.B. Mathur, for the respondent. BY THE COURT:- (Per Hon'ble Jhaveri, J.) 1. By way of this appeal, the assessee has challenged the judgment and order of the Tribunal whereby the Tribunal has allowed the appeal of the revenue and partly allowed the cross-objections of the assessee. 2. This Court while admitting the appeal framed the following substantial questions of law vide order dated 21.7.2003:- “Whether on the facts and in totality of circumstances, fixed deposits having been made which were charged in favour of the secured creditor, SBI and the fixed deposits were also with SBL, the learned Tribunal was right in law in not netting the interest receipts against interest expenditure and in not setting off the same but taxing the gross receipts of Rs.51,35,317/-? Whether the directions contained in para 52 to adjust the amount of unabsorbed depreciation of earlier ten years against such profit or short term capital gain on sale of such assets and then find 2 out the remainder, if any, and allow such remainder during the assessment year 1992-93 are not without jurisdiction and invalid in law?” 3. Counsel for the appellant mainly contended that the facts of the matter are that the winding up order came to be passed on 2.12.1983. State Bank of India, the secured creditor's claim of Rs.660.29 lacs was allowed by O.L. vide order dated 25.02.1988. Company Court directed to dispose of the property of the company which came to be disposed of 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/- was deposited in the fixed deposit with bank. On 29.3.1994, company court ordered to withdraw 50% F .D. amount for disbursement. However, the company has earned interest of Rs. 51,35,317/- on the Fixed Deposit and interest has also accrued on the loan of the secured creditor's of SBI to the tune of Rs.4,51,89,000/- on the unpaid admitted loan amount. On 11.8.1992. Pursuant to the return for the assessment year 1992-93, an order came to be passed by ITO. The I.T.O. has not allowed the set off of the interest earned (Rs.51,35,317/-) against interest payable. However CIT in appeal allowed the set off of the interest gained against interest payable vide order dated 31.3.1995, but the 3 tribunal has reversed the same on the ground that CIT ordered set off of the interest gained against interest payable was not permissible. The Tribunal, however, allowed the claim of setting off of unabsorbed depreciation as against the interest income. 5. Counsel for the appellant has contended that in view of Rule 179 of the Company's Court Rules, 1959 and Section 57 of the Income Tax Act, 1961 and also Rule 293, 296, 297 and Rule 470 of the Rules, the view taken by the tribunal is contrary to the decision of the Supreme Court in M/s. Vijaya Laxmi Sugar Mills Ltd vs Commissioner Of Income Tax reported in (1991) ITR (SC)641 wherein in para no.10, it has been held as under:- “The next submission of the learned counsel for the assesee was that in the course of effecting the winding up of the assessee company the Liquidator has been incurring expenses such as salaries, legal fees, travelling expenses and other liquidation expenses and that these expenses are allowable deduction from income earned by way of interest from fixed deposits in the relevant year. In computing the income chargeable under the head \"Income From Other Sources\", section 57(iii) provides that deduction is to be made in respect of expenditure laid out or expended wholly and exclusively for the purpose of making or earning such income. The question for consideration, therefore, is wheth- er the expenses of the type incurred by the Liquidator in this case can be said to have been incurred solely for the purpose of earning the interest income. It is true that the connection between the expenditure and the earning of income need not be direct and it may be indirect. But since the expenditure must have been incurred for the 4 purpose of earning that income there should be some nexus between the expenditure and the earning of the income. There is not even some sort of an evidence to show that the expenses incurred by the Liquidator was to facilitate the earning or at least for protecting of the income. The interest accrues SUI GENERIS. The interest is payable by the bank whether it is claimed or not and whether there is any establishment or not. Normally there was no necessity for spending anything separately for earning the interest. However we may hasten to add that if any explenditure was incurred like commission for collection or such similar expenditures which may be considered as spent solely for the purpose of earning that income, the position may be different. But that was not so in this case. It could not also be said that the expenditure incurred was to preserve or acquire the asset. Nor could it be said that the expenses were incurred for the purpose of maintenance of the source. The requirement under section 57(iii) that the expenditure should have been incurred \"for the purpose of making or earning such income\" show that the object of spending or the end or aim or the intention of such spending was for earning the interest income. There could be no doubt that the expenditure incurr- eid by the Liquidator in this case can by no stretch be said to have been incurred with the object or for the purpose of earning the interest income. The Tribunal was, therefore, right in holding that the expenses claimed are not related to the interest income and was not a deductable expenditure under section 57.” 5.1 Another judgment of Supreme Court in Chandipore Fisheries Pvt. Ltd. vs. Commissioner of Income Tax reported in 1992 ITR 565 in para no.15, holding as under:- “On a careful consideration of the facts and circumstances of this case, we are of the view that the fixed deposit receipts had, in fact, been made over to the shareholders and the resolution for the distribution of the proceeds of the said 5 fixed deposit receipts were duly passed and that intimation was also furnished to the bank concerned about the transfer. On a construction of the letters written by the liquidator to the Manager, United Bank of India, and the certificates given by him to which reference has already been made, it is evident that the fixed deposit receipts were transferred in favour of the shareholders who alone are entitled to receive the interest. As a matter of fact, the term deposit receipts were physically handed over to different shareholders who alone were entitled to the interest thereon. If that be the position, it cannot be said that the interest on the fixed deposits would still remain the income of the company in liquidation. In any event, the company in liquidation was merely a trustee for the shareholders to whom the fixed deposit receipts had been transferred and the interest income would be assessable only as income of the beneficiaries and not as 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 business expenditure as the unit was closed, and hence deduction thereof cannot be allowed from the interest income as provided under Section 57(iii) of the Act of 1961. 7. In light of the above submissions, issue no.2 is not pressed by the counsel for the appellant. 8. In view of the above observations, only the issue no.1 is considered. 9. We have heard counsel for the parties. 6 10. The factual matrix reveals that the company was closed on 2.12.1983 it is undisputed that no business was being carried out, the interest accrued cannot be termed as business expenditure and the interest which was paid was in the course of winding up of the company. In view of the fact that the claim of secured creditors against the claim of the workers under Section 529 of the Companies Act 1956 will not take precedence, the FDR was got made. Taking into consideration the fact, the interest income is to be reckoned as income from other source. 11. Mr. Mathur has relied on the judgment of the Kerala High Court in Commissioner of Income Tax vs. Vaikundam Rubber Co. Ltd. reported in (2002) 253 ITR 417 wherein it has been held as under:- “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 7 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 under Section 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 under Section 256(2) of the Income-tax Act. We also find that the earlier view adopted by this court in CIT v. Dr. V. P . Gopinathan [1998] 229 ITR 801 was reversed by the Supreme Court in GT v. Dr. V. P . Gopinathan [2001] 248 ITR 449, 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.” 12. In that view of the matter, we are of the opinion that the netting of the interest paid and the interest received is not permissible. Section 57(iii) of the Income Tax Act also does not help the assessee, in peculiar facts of the case, the assessee cannot be heard to say that it has spent Rs.4,51,89,000/- for earning interest of Rs.51,35,317/- on 8 the FDR. Hence, the view taken by the tribunal is just and proper and more particularly in the light of observations made by the Supreme Court in para no.10. 13. In that view of the matter, the issue is answered in favour of the Department and against the assessee. 14. The appeal stands dismissed. (Dinesh Mehta), J. (K.S. Jhaveri), J. Brijesh "