By TIOL News Service

JAIPUR, JULY 26, 2017: THE ISSUE BEFORE THE COURT IS - Whether interest paid by company to their secured creditors during course of winding up, can be allowed for set off against interest receivable on FD created with bank out of sale realization from auction of compny's assets. NO is the verdict.

Facts of the case:

During the subject year, an order for winding up of Assessee's company was passed, wherein, State Bank of India, the secured creditor's claim of Rs.660.29 lacs was allowed. The 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/-. 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. After some time, company court ordered to withdraw 50% F.D. amount for disbursement. However, the company has earned interest of Rs. 59,31,141/- on the Fixed Deposit and interest had also accrued on the loan of the secured creditor's of SBI to the tune of Rs.5,33,23,380/- on the unpaid admitted loan amount. Therafter, pursuant to the return for the A.Y 1993-94, an order came to be passed by ITO, who denied the set off of the interest earned (Rs.59,31,141/-) against interest payable. On further appeal, the Tribunal confirmed the AO's order as regards set off. However, it had allowed the claim of setting off of unabsorbed depreciation as against the interest income.

On appeal, the HC held that,

++ the factual matrix reveals that the company was closed on Dec 02, 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 u/s 529 of the Companies Act 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. It is seen that in case of Commissioner of Income Tax vs. Vaikundam Rubber Co. Ltd., it has been held that: "....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 u/s 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...." In that view of the matter, 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 FDR. Hence, the view taken by the tribunal is just and proper.

(See 2017-TIOL-1397-HC-RAJ-IT)