Income Tax Appellate Tribunal - Cochin
Dr. V.P. Gopinathan vs Income-Tax Officer on 26 July, 1990
Equivalent citations: [1990]35ITD574(COCH)
ORDER
G. Santhanam, Accountant Member
1. The appeal is time barred by nine days and we are satisfied with the explanation for the delay in the filing of the appeal and, therefore, the same is condoned.
2. The only point at dispute before us is whether the assessee is to be assessed on the gross amount of interest received by him on his fixed deposits or on the net amount of interest, which is the gross amount of interest received as reduced by the amount of interest paid on the loans taken on the security of such deposits. To be more specific, the assessee received interest on his fixed deposits with the bank in a sum of Rs. 1,17,444 and had paid interest amounting to Rs. 90,410 on the loans taken on the security of such fixed deposits. The assessee sought to offer the net amount of interest, namely, Rs. 27,034, whereas the Income-tax Officer took the gross receipt of Rs. 1,17,444 as income from other sources. On appeal, the CIT (Appeals) held that what is envisaged as a deduction Under Section 57(iii) is only the expenditure incurred in earning the income and, therefore, the assessee is not entitled to set off the interest payment against the interest receipt. The assessee is on appeal.
3. Shri K.B. Menon, the learned counsel for the assessee, submitted that he is not raising his case under Section 57(iii) of the IT Act. In fact, it was never his case. The assessee had deposits with the bank and for constructing a house, he took certain loans creating a charge on the deposits. Such loans are popularly known as 'Loan on Fixed Deposits'. There is a difference between such loans and other secured loans in the sense that in respect of loans on fixed deposits the rate of interest is only 1 1/2 % to 2 1/2 % higher than the rate of interest which the fixed deposits should be earning whereas in the case of other types of secured loans the lending rate will be much higher in the range of 15% to 16 1/2 % depending upon the circumstances of the case. In fact, the borrowing from the bank to the extent of 75% of the fixed deposits lying with the bank constituted one and the same transaction because the loan is measured along with the length of the fixed deposit and the period of loan is also confined to the tenure of the deposit. Thus, there is a nexus between the act of deposit and the act of taking a loan and though for accountancy purposes the banker may keep the loans and the deposits in different accounts, they are part and parcel of the same transaction or they can be looked upon as two sides of the same coin. Even otherwise, if the assessee had withdrawn the entire deposits, it would not have earned even that much interest which he had earned by taking a loan on fixed deposit and, therefore, from the angle of real income what is relevant is only the net amount of interest earned by the assessee by depositing the amount with the bank with a provision loan to be taken on the same. Hence, it is only the net amount of interest that is exigible for tax. He relied on the following decisions - CIT v. Andhra Farm Chemicals Corporation [1988] 171 ITR 660/40 Taxman 143 (AP), Indian Overseas Bank v. CIT [1990] 183 ITR 200 (Mad.), Kewal Chand Bagri v. CIT [1990] 183 ITR207 (Cal.) and CIT v. Kerala State Industrial Development Corporation Ltd. (No. 2) [1990] 182 ITR 67 (Ker.).
4. Shri A.D. Menon, the learned departmental representative, submitted that the decision of the Andhra Pradesh High Court in Andhra Farm Chemicals Corporation's case (supra) would not apply to the facts of the case because it was a transaction between Subsidiary Company and Holding Company. There is no question of principle of mutuality in this transaction. The Cochin Bench of the Tribunal in the case of Dr. K. Madhavan Pillai v. ITO [IT Appeal No. 285 (Coch.) of 1979] had gone into the factum of the question whether the act of borrowing on the security of the fixed deposit was part of the same transaction or it amounted to a different transaction and after discussing in detail the nature of both the transactions decided the issue against the assessee. It had also rejected the real income concept relied on by the assessee holding that the interest which he earned on the fixed deposit which was altogether an independent transaction represented in every sense the real income of the assessee. Thus, he supported the orders of the authorities.
5. Shri K.B. Menon, in his reply, submitted that the ratio laid down by the Cochin Bench of the Tribunal is no longer good law in the light of the decision of the Andhra Pradesh High Court cited supra. There is no other decision of the High Court and, therefore, in the ratio of the decision of the Bombay High Court in the case of CIT v. Smt. Godavaridevi Saraf [1978] 113 ITR 589, the only available decision of the Andhra Pradesh High Court will have all persuasive influence. In this view of the matter, he submitted that there was no need to refer the case to a Special Bench.
6. Having regard to rival submissions and materials on record, we uphold the contention of Shri K.B. Menon, the learned counsel for the assessee. Normally we are bound by the decision of the Cochin Bench of the Tribunal cited by the revenue which is in its favour. However, having regard to the contention of Shri K.B. Menon that the decision of the Cochin Bench was rendered without regard to the decision of the Andhra Pradesh High Court, which was by a Superior Court than that of the Tribunal, we hold that the assessee is entitled to succeed in his claims. In Andhra Farm Chemicals Corpn.'s case (supra), the assessee, a subsidiary company, had certain monies lying with it and with a view not to keep the said monies idle, it deposited the same with its holding company and in the meanwhile the assessee required some money and it borrowed the same from its holding company. Thus, the assessee had to pay interest on its borrowings and received interest on its deposits and the payment of interest was set off against the interest receipt and the balance was offered for taxation. The Tribunal held that though for the purpose of accountancy there appeared to be two independent transactions, viz., one of the deposit by the assessee with its holding company and the other of borrowing of money from its holding company, they were in truth and reality one single transaction and only the difference between the interest received and interest paid represented the income of the assessee. The High Court upheld such a view and observed as follows:
In our opinion, Section 57(iii) has no application to the facts of the present case, in view of the finding recorded by the Tribunal. It is not as if the Tribunal has found that the interest income is Rs. 34,865 and that the amount of Rs. 13,464 should be allowed as expenditure under Section 57(iii). What it has really found is that, though for the purpose of accountancy, they appear to be two independent transactions, viz., one of deposit by the assessee with Andhra Sugars Ltd. and the other a transaction of borrowing of money by the assessee from Andhra Sugars Ltd., they are in truth and in reality only a single transaction and hence the income received by the assessee is only Rs. 21,401 and nothing more ...Once that finding is accepted as correct, there is no scope for applying Section 57(iii).
In the case before us also though technically the act of making deposit and the act of borrowing money on such deposit are two different acts, they cannot be viewed as representing two different transactions. The reason is that firstly, the loan is granted because there was a deposit in favour of the assessee, secondly, the loan is measured along with the quantum of deposit held thirdly, the banker has a right to adjust the deposit against the loan in case of default on the part of the assessee to clear the loans and lastly unlike other secured loans the rate of interest on the loans on fixed deposits is a differential rate in the sense that it is just above 1% to 2% than the rate allowed on the fixed deposits. There is thus a nexus between the deposit and the borrowing and hence the making of the deposit and taking of the loan can be viewed only as representing two sides of the same coin.
7. Shri A.D. Menon, the learned departmental representative strenuously strived to distinguish the decision of the Andhra Pradesh High Court stating that in that case it was a transaction between a subsidiary company and the holding company. In our view, that is not the substance of the matter and the difference sought to be made by the learned departmental representative between the case before the Andhra Pradesh High Court and the one before us is only a difference without distinction. It is like distinction between tweedledum and tweedledee. Shri Menon for the revenue vehemently contended that the case is squarely covered by the decision of the Cochin Bench in the case of Dr. K. Madhavan Pillai (supra) and if at all a different view is to be taken, the matter must be referred to a Larger Bench. We have given our anxious thought on the plea of the learned departmental representative and we are unable to subscribe to his point of view for the reasons stated in the succeeding paragraph.
8. In Godavaridevi Saraf's case (supra) the Hon'ble High Court of Bombay has held that in the absence of a decision of a jurisdictional High Court and in the absence of a decision of any other High Court to the contrary, the decision rendered by a High Court of Judicature of any State would be binding on all. In the light of the above decision, we are bound to follow the Andhra Pradesh High Court decision which is the only decision available as on date as no other decision of any other High Court was cited before us. Therefore, we reject the contention of the learned departmental representative.
9. The learned departmental representative referred to the decision of the Supreme Court in the case of Keshavji Ravji and Co. v. CIT [1990] 183 ITR 1 and contended that it was only in bankruptcy proceeding the principle of set off was statutorily recognised and in the absence of any such statutory recognition it was his submission that no set off can be given as between interest payment and the interest receipt. We have carefully considered the passage occurring at page 15 of the case cited supra wherein their Lordships of the Supreme Court referred to Section 46 of the Provincial Insolvency Act to stress the idea of mutual dealings and held that where two or more transactions on which interest is paid to or received from the partner by the firm are shown to have the element of mutuality and are referable to the funds of the partnership as such, there is no reason why Section 40(b) should be so construed as to exclude in quantifying the interest on the basis of such mutuality. This decision also, in our opinion, supports the stand of the assessee. The funds of the banks come from the depositors. When a depositor takes a loan on his deposit, the principle of mutual dealings could be inferred. Perhaps that is the reason why the bank charges a lower rate of interest on the loans given on the security of the deposits with it. No doubt, this principle of mutual dealing cannot be extended to the other situation such as when the deposits of one bank is offered as a security with another Bank for making the borrowings from the other bank. But so long as the deposits and the borrowings are with the same branch of the bank, the nexus between the two is manifest in the transaction itself and the principle of mutual dealings can certainly be invoked. For all these reasons, we uphold the contention of the assessee.
10. For the reasons stated above, we hold that the assessee is entitled to set off the interest paid on his borrowings against interest received on fixed deposits.
In the result, the appeal is allowed.