Taxability of fixed-deposit interest: borrowed funds and pre-commencement salary cannot be set off without statutory allowance.
Interest earned on short-term fixed deposits made out of borrowed funds was treated as taxable revenue income, and the assessee could not automatically set off the corresponding interest paid on the borrowings unless the Act specifically allowed such deduction. The fact that the deposits were funded by borrowings did not change the character of the receipt or expand the available statutory deductions. Salary expenditure incurred before commencement of business was also disallowed against fixed-deposit interest, because no business income had yet arisen and the expense was not deductible under that head. The Revenue's appeals succeeded and the assessment order was restored.
Issues: (i) Whether interest earned on short-term fixed deposits out of borrowed funds could be set off against interest paid on the borrowed funds. (ii) Whether salary expenditure could be allowed against interest income earned from fixed deposits before commencement of business.
Issue (i): Whether interest earned on short-term fixed deposits out of borrowed funds could be set off against interest paid on the borrowed funds.
Analysis: The interest earned on the fixed deposits was income with a revenue character and was taxable unless specifically exempted. The fact that the deposits were made out of borrowed funds did not alter the character of the receipt or permit automatic adjustment of interest expenditure against such income. The availability of deduction depended on the statutory provisions governing income assessable under the relevant head, and the claim did not fall within the permitted deductions.
Conclusion: The claim for set-off was rejected and was against the assessee.
Issue (ii): Whether salary expenditure could be allowed against interest income earned from fixed deposits before commencement of business.
Analysis: Since the business had not commenced, the expenditure could not be claimed as a business deduction against the interest income. In the absence of business income, the salary expense was not allowable to reduce the interest assessable under the Act.
Conclusion: The claim for salary expenditure was rejected and was against the assessee.
Final Conclusion: The appeals succeeded for the Revenue and the assessment order was restored.
Ratio Decidendi: Interest earned on temporary deposits made from borrowed funds is taxable as income, and unless the Act specifically permits a deduction or set-off, related interest or salary expenditure cannot be adjusted against that income, especially before commencement of business.
TaxTMI 
AI Drafter ✕
TaxTMI 
