Interest on fixed deposits cannot be netted against borrowing costs unless the expenditure was incurred wholly and exclusively to earn that income.

Interest earned on fixed deposits created during winding up was assessable as income from other sources, and the borrowing costs could not be netted against that income. Deduction under section 57(iii) was unavailable because the interest on borrowings was not expenditure laid out wholly and exclusively for earning the fixed-deposit interest, and no sufficient nexus existed between the borrowings and the income. The principle applied was that interest income cannot be reduced unless the statute expressly permits the deduction or set-off. The claimed set-off was therefore not permissible and the issue was decided against the assessee.

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Issues: Whether the interest earned on fixed deposits during winding up could be netted against the interest payable on borrowings, and whether such set-off was allowable under section 57(iii) of the Income-tax Act, 1961.

Analysis: The company had ceased business and the fixed deposits were created in the course of winding up. The interest on the fixed deposits was income from other sources. The interest paid on borrowings was not expenditure laid out wholly and exclusively for earning that interest income, and there was no sufficient nexus to justify netting. Section 57(iii) permits deduction only where the expenditure is incurred for the purpose of making or earning the income, which was not satisfied on the facts. The decision also accorded with the principle that interest income cannot be diminished unless a legal provision permits such reduction.

Conclusion: The netting of interest was not permissible and the assessee was not entitled to the claimed set-off; the issue was decided against the assessee and in favour of the Revenue.

Ratio Decidendi: Interest earned on fixed deposits is assessable as income from other sources, and interest paid on borrowings cannot be set off against that income unless the expenditure was incurred wholly and exclusively for earning the interest income and the statute expressly permits such deduction.

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