The judgment of the court was delivered by
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.
2. This court while admitting the appeal framed the following substantial questions of law vide order dated September 8, 2004 :
"Whether on the facts and in totality of circumstances, the fixed deposits having been made which were charged in favour of the secured creditor, the State Bank of India and the fixed deposits were also with the State Bank of India, 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. 59,31,141 ?
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 out the remainder, if any, and allow such remainder during the assessment year 1993-94 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 December 2, 1983. The State Bank of India, the secured creditor's claim of Rs. 660.29 lakhs was allowed by the official liquidator vide order dated February 25, 1988. The company court directed to dispose of the property of the company which came to be disposed of and sale realisation from auction of the company's assets, having charge of State Bank of India 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 the bank. On March 29, 1994, the company court ordered to withdraw 50 per cent. of the fixed deposit amount for disbursement. However, the company has earned interest of Rs. 59,31,141 on the fixed deposit and interest has also accrued on the loan of the secured creditor's of the State Bank of India to the tune of Rs. 5,33,23,380 on the unpaid admitted loan amount. On February 23, 1996 pursuant to the return for the assessment year 1993-94, an order came to be passed by the Income-tax Officer. The Income-tax Officer has not allowed the set off of the interest earned (Rs. 59,31,141) against interest payable. However the Commissioner of Income-tax in appeal allowed the set off of the interest gained against the interest payable vide order dated March 19, 1996, but the Tribunal has reversed the same on the ground that the Commissioner of Income-tax ordered set off of the interest gained against the interest payable was not permissible. The Tribunal, however, allowed the claim of setting off of the 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 rules 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 Vijaya Laxmi Sugar Mills Ltd. v. CIT reported in [1991] 191 ITR 641 (SC) wherein in para no.10, it has been held as under (page 646) :
"The next submission of the learned counsel for the assessee 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 whether 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 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 evidence to show that the expenses incurred by the liquidator were to facilitate the earning of 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 expenditure 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' shows 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 incurred 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 were not deductible expenditure under section 57."
5.1 Another judgment of the Supreme Court in Chandipore Fisheries Pvt. Ltd. v. CIT reported in [1992] 195 ITR 565 (SC) in para. No. 15, holding as under (page 573) :
"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 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 share holders 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 share holders 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 the Assessing Officer and contended that in view of the findings of the Assessing Officer, 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.
10. The factual matrix reveals that the company was closed on December 2, 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 fixed deposit receipt was got made. Taking into consideration the fact, the interest income is to be reckoned as income from other sources.
11. Mr. Mathur has relied on the judgment of the Kerala High Court in CIT v. Vaikundam Rubber Co. Ltd. reported in [2002] 253 ITR 417 (Ker) wherein it has been held as under (page 418) :
"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. In 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 asses see'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 (Ker) was reversed by the Supreme Court in CIT v. Dr. V. P. Gopinathan [2001] 248 ITR 449 (SC), 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. 5,33,23,380 for earning interest of Rs. 59,31,141 on the fixed deposit receipt . Hence, the view taken by the Tribunal is just and proper and more particularly in the light of the 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.