Statutory trust-like deposit income: custodian remuneration and administrative expenses allowed as deductions before taxing interest

Interest earned on a compulsory deposit maintained under a statutory acquisition framework was assessable only after deducting the custodian's remuneration and administrative expenses under section 57(iii). The expenditure was treated as necessary, genuine, and directly connected with the earning and application of that interest because the custodian held the deposit in trust for the company and managed it under mandated statutory duties. On that basis, the net interest receipt alone was taxable, and the deductions were allowed in favour of the assessee.

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Issues: Whether the remuneration of the custodian and the administrative expenses incurred in managing the company were allowable deductions against the interest income received on the deposit of Rs. 30 lakhs under section 57(iii) of the Income-tax Act, 1961.

Analysis: The custodian was appointed under the acquisition statute to manage the company under a statutory framework. The amount of Rs. 30 lakhs was required to be kept in deposit, the custodian held it in trust for the company, and the interest earned was subject to statutory duties and expenditure incurred in administration of the company. The expenditure was found to be necessary, genuine, and directly connected with the earning and application of the interest income, forming part of an integrated statutory process. On that footing, the interest receipt could be brought to tax only after deducting the remuneration and administrative expenses.

Conclusion: The deductions were allowable and the question was answered in favour of the assessee.

Ratio Decidendi: Where interest income is earned and applied under a statutory trust-like arrangement with mandatory administrative expenditure, such expenditure is deductible before taxation of the net receipt.

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