Interest income set-off requires proven nexus with borrowings; estimated expenditure allowed where correlation was not established

Where the nexus between borrowed funds and interest-earning advances was not fully established, a proportionate expenditure could be estimated against the interest income. The tribunal accepted a 50% allowance as a fair approximation on the available material and rejected the Revenue's challenge. The interest balance was treated under the head 'Income from other sources' for section 80HHC computation. A separate appeal was not entertained on limitation, and the cross-appeals were dismissed.

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Issues: Whether, on the facts, 50% of the interest income could be treated as expenditure incurred to earn such income and whether the balance interest income was correctly assessed under the head "Income from other sources" while computing deduction under section 80HHC.

Analysis: The assessee had earned interest on advances while also paying substantial interest on borrowings, but complete correlation between the borrowings and the advances was not established. In the absence of a separate cash flow statement for all loan transactions, the claim that the entire interest receipt should be netted off against interest paid was not proved. The estimated allowance of 50% of the interest receipt as related expenditure was found to be a fair approximation on the material available.

Conclusion: The estimate of 50% expenditure against the interest income was upheld and the departmental challenge failed; the assessee obtained the benefit of partial set-off, but no further relief was granted on the merits of its delayed appeal.

Final Conclusion: The substantive controversy on treatment of interest income was resolved against the Revenue, while the assessee's separate appeal was not entertained on limitation and the cross-appeals stood dismissed.

Ratio Decidendi: Where complete nexus between borrowed funds and interest-earning advances is not established, the adjudicating authority may reasonably estimate and allow a proportionate expenditure attributable to earning the interest income.

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