Fixed-deposit interest cannot be reduced by loan interest paid against the deposit unless the Income-tax Act expressly allows it.

Interest earned on a fixed deposit is taxable as income, and it cannot be reduced by interest paid on a loan raised against that deposit unless the Income-tax Act expressly permits such set-off. Section 57(iii) allows deduction only where the expenditure is laid out wholly and exclusively for earning that income within the statutory framework. On that basis, the interest paid on the borrowings was not deductible against the fixed-deposit interest, and the claim for reduction of income was disallowed.

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Issues: Whether interest paid on borrowings made against a fixed deposit can be deducted from the interest earned on that fixed deposit under section 57(iii) of the Income-tax Act, 1961.

Analysis: The assessment year was 1981-82. The assessee earned interest on a fixed deposit but had borrowed against that deposit and paid interest on the loan. The Court held that the claim for deduction could not be accepted because any set-off or deduction of expenditure must be supported by the Income-tax Act. The interest received from the bank remained income in the assessee's hands, and the interest paid on the borrowal did not reduce that income in the absence of an enabling provision. The Court also relied on the Supreme Court's decision holding that interest on a fixed deposit cannot be diminished by interest paid on the loan taken against it unless the statute so permits.

Conclusion: The deduction was not allowable under section 57(iii), and the question was answered in favour of the Revenue and against the assessee.

Ratio Decidendi: Interest earned on a fixed deposit is taxable as income unless the Act expressly permits its reduction, and interest paid on a loan taken against that deposit is not deductible under section 57(iii) unless it is shown to be expenditure laid out wholly and exclusively for earning that income within the statutory framework.

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