TMI Blog2007 (2) TMI 441X X X X Extracts X X X X X X X X Extracts X X X X ..... me-tax (Appeals) has gone wrong in disallowing the deduction of the interest paid on the Bank loan from the interest received on the advance on the plea that the interest on the O/D original loan could not be said to be remaining for a long period adjusted. " 3. The facts of the case in brief are that the assessee is an individual. The assessee derives income from salary besides income from export business. The assessee filed his return of income on 20-11-1997 declaring total income at Rs. 32,700, which was subsequently revised on 10-12-1997 declaring the same income. This return was processed under section 143(1)( a ) of the Act. Subsequently notice under section 148 was issued on 17-8-2000 and in response to this notice, the assessee filed the return of income on 17-8-2000 declaring income at Rs. 30,083. The assessee was also served notice under section 143(2) of the Act on various occasions. 3.1 The assessee maintains three sets of accounts - i.e., (1) Palm Fibres and Yarn Trading Co. - coir division, in coir products; (2) Coir Products Division; and (3) HCM Division. In all the accounts, the assessee has arrived at the net income at Rs. 36,36,770 and after deduction ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... account and the assessee parted with part of the loan to another concern Capricon Complex from whom the assessee received interest on such advance. According to him the bank had stated that the amount transferred to Capricon Account was on 8-1-1992 and it was not the loan outstanding with the bank. Therefore, the Assessing Officer was of the opinion that the assessee must have paid this loan long back. Further the main object of the assessee s loan from packing credit was to facilitate his export business and whatever interest paid on such loan was indisputably admissible as a deduction from the profits and gains of his export business for which the very loan was taken. The diversion of part of the loan to another concern in which the assessee had an interest was not in connection with his export business and therefore, the interest received on such diverted loan in the hands of the assessee was taxable as income from other sources to which the assessee has no direct liability to pay interest but the interest payable was directly connected with his packing credit loan account outstanding loans of the current year and not the outstanding loan of 1992 and as such deductible from his ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ly allowed against business income. 5. The first appellate authority after considering the above submissions of the learned representative of the assessee observed in para 4 of the appellate order, as under : "Rival contents considered. The Assessing Officer is right when he points out that the interest on the O/D original loan could not be said to be remaining for a long period unadjusted. The following points are noteworthy: ( a )There has been no diversion of interest bearing funds during the current year. Hence the question of disallowing proportionate interest on a diversion that took place years earlier, does not arise. ( b )It is a principle of First in first out that interest on earlier O/D funds get adjusted first before fresh O/D loans are taken. ( c )The question of diversion of interest bearing business funds for non-business purposes would arise only to that point when the entire interest on the diverted amount has been adjusted to current account. Credits. Such an exercise has not been done here. Hence the Assessing Officer s order is upheld. The AR claims that for even later years such claims have been allowed. The Assessing Officer may review the same ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rasad Moody [1978] 115 ITR 519 (SC). Their Lordships said that the interest so paid should be deducted from the income from other sources under section 57( iii ) of the Act. The Hon ble Court went a step further and said that the expenditure is still deductible even where the investment does not fetch any income at all. In H.K. (Investment) Co. (P.) Ltd. v. CIT [1995] 211 ITR 511, the Gujarat High Court said that where an assessee has business income as well as income from other sources, the interest paid has to be bifurcated proportionately between Business income and Income from other sources . The ratio of this decision squarely applies to the facts of the present case too. Various High Courts in India have consistently followed the decision of the Apex Court in 115 ITR 519 (SC) cited above and it is submitted that no longer any controversy is left over the question of granting deduction under section 57( iii ) from the income earned. To cite a recent decision the Mumbai C Bench of the Tribunal in Dy. CIT v. Diamond Creek [2003] 30 DTC 351 where the Hon ble Tribunal found that the interest paid on borrowing for making advances should be deducted from the amou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essing Officer to be assessed under "other sources" in respect of the interest earned from sister concern. The debit of interest is under the head "Business" whereas the receipt of interest from the sister concern is under the head "Other sources" and hence for this reason also there cannot be set off of expenditure under one head against, the income under the other head. On this reasoning also, the claim of the assessee is not allowable. Since the decision of the Apex Court is arising out of the case of the jurisdiction of Kerala High Court, I do not think it necessary to follow the decision of the Hon ble High Court of Gujarat in the case in H.K. (Investment) Co. (P.) Ltd. v. CIT [1995] 211 ITR 511 , it being only a decision of High Court of other jurisdiction whereas Dr. V.P. Gopinathan s case ( supra ) is the decision of the Full Bench of the Apex Court in the case arising out of the jurisdiction of Kerala High Court itself. In this view of the matter, since I am not agreeing that the decision of the Apex Court in the case of Dr. V.P. Gopinathan ( supra ) is distinguishable, as claimed by the learned represent- tative of the assessee, following the decision of the Apex ..... X X X X Extracts X X X X X X X X Extracts X X X X
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