The interest received u/s. 244A of the Income-tax Act, 1961 (‘the Act’) is taxable under the head ‘Income from Other Sources’ (‘IFOS’) as has been held by the Delhi High Court in the case of CIT v. Delhi State Industrial & Infrastructure Development Corporation Limited. [TS-5913-HC-2012(DELHI)-O].

An interesting question however arises that where interest is also paid to the Income Tax Department (‘Department’) under various sections of the Act, then whether one can claim a deduction or set-off of such interest paid against the interest received u/s. 244A of the Act, and offer only the net amount thereof as taxable.

Before the decision in the case of Sandvik Asia

The Delhi Tribunal, in the case of R.N. Aggarwal v. ITO [TS-5667-ITAT-1981(DELHI)-O], held that the interest received and paid are to be assessed under the head IFOS. It was also held that the real income from interest had to be determined in this manner and to be considered while making the assessment. If the issue was considered from this angle, it would be immaterial whether the interest paid u/s. 220(2) was or was not deductible u/s. 28(i) or u/s. 57(iii) of the Act. Hence the interest paid u/s. 220(2) should be adjusted against the interest received u/s.244A and only this net amount should have been taxed.

Subsequently, in the case of Cyanamide India Limited [ITA No. 4561/Bom/1982, dated 23 May, 1984] before the Mumbai Tribunal, the assessee had received interest and paid interest under the provisions of the Act. The assessee made an alternative submission that between the two persons there can be only one account. Proceeding on that basis it was held by the Tribunal that one has to consider the net interest received by the assessee as its IFOS and accordingly the deduction of interest was allowed.

However, the Gauhati Tribunal, in the case of ACIT v. Hazarimal Nandlall [ITA Nos. 240 and 241/Gau/1999 , dated 31 January 2003], while considering the issue of deduction of interest on income-tax and the applicability of provisions of section 57, held that since neither the assessee has claimed the deduction of such interest u/s. 57 nor there is any provision u/s. 57 to allow such interest, the deduction of such interest cannot be allowed u/s. 57 or 57(iii). It was further held that the assessee has not borrowed any amount from the Income Tax Department, therefore, it cannot be held that the interest paid on income-tax to the Department is liable u/s. 36(1)(iii). It was also held that the assessee is not entitled for any deduction u/s. 37.

Decision in the case of Sandvik Asia

In the case of Sandvik Asia Ltd v. DCIT [TS-5279-ITAT-2011(Pune)-O] before the Pune Tribunal, while the Honourable Accountant Member (‘AM’) held the issue in favour of the Assessee by relying on the decisions in the cases of R.N. Aggarwal v. ITO (supra) and Cyanamide India Limited (supra), to the effect that there can be only one account between two parties and therefore, only the net interest received from the Department i.e. interest received less the interest paid, is taxable; the Honourable Judicial Member (‘JM’) differed with this view.

The Honourable JM observed that the deduction of interest was claimed under the head ‘Business’ and that the interest received by the assessee from the Department was not assessed under the residuary head of IFOS. He also observed that it was not the assessee’s claim that the interest received should be assessed under the head IFOS and that the basis of its claim was only that there can be only one account between the two parties and in such a case the interest paid and the interest received should be set off against each other. However, the Honourable JM pointed that the assessee could not show that under which provision of law such deduction of interest is allowable, and therefore, held that such an accounting method claimed by it, is contrary to law and cannot override the provisions of Act as held by the Supreme Court in the case of Tuticorin Alkali Chemicals & Fertilizers Limited v. CIT [TS-10-SC-1997-O].

The Honourable JM further noted that the assessee failed to establish any nexus between the interest paid and interest received. He accordingly held that even under the head IFOS, the interest paid to the Department was not allowable as a deduction following the decision of the Supreme Court in the case of CIT v. Dr. V.P. Gopinathan [TS-8-SC-2001-O]. As regards the reliance by the assessee in the cases of R.N. Aggarwal v. ITO (supra) and Cyanamide India Limited (supra), the Honourable JM observed that the same cannot be applied in the light of the judgment of the Supreme Court in the case of Bharat Commerce & Industries Limited v. CIT [TS-5-SC-1998-O].

Certain other decisions of the High Courts were also referred to by the Honourable JM in rejecting the contentions of the assessee. In particular, he placed reliance on the order of the Guahati Tribunal in the case of ACIT v. Hazarimal Nandlal (supra), the Bench in which case was constituted by the same Members.

The matter was accordingly referred to the Honourable Third Member (‘TM’), who proceeded to deal with the issue considering the provisions of the Act for taxability under the head ‘Business’, as the head of income was not in dispute before him; but noted that having regard to the legal position, one would have thought that interest on refunds of tax was always assessable under the residuary head.

Accordingly, referring the decisions of the Supreme Court in the cases of Bharat Commerce & Industries Limited (supra) and CIT v. Dr. V.P. Gopinathan (supra), it was held that the interest paid can neither be allowed as deduction u/s. 36(1)(iii) or 37 of the Act, nor can it be netted off against the interest income.

On the point of netting off of the interest paid against interest received, the Honourable TM also followed the decision of the Bombay High Court in the case of Aruna Mills Ltd. v. CIT [TS-2-HC-1956(BOM)-O] rendered in the context of 1922 Act. The Honourable TM noted that one of the arguments advanced on behalf of the assessee in that case was that the Court must look at the payment and receipt of interest by the assessee as a single indivisible transaction and when so looked, the transaction should be held to have resulted in the assessee receiving only the excess of the interest received over the interest paid and hence, only such excess would be liable to tax. It was further argued that it was not proper to sever the transaction, i.e. to tax the interest received and not to allow any deduction for the amount of interest paid. Dealing with this argument, the Bombay High Court held that in their opinion there was no relationship whatever between the receipt of interest by the assessee and the payment of interest under the provisions relating to payment of advance tax. It was pointed out that it was difficult to understand what connection there is between the advance tax paid by the assessee by his discharging the statutory obligation and receiving the interest, and the failure of the assessee to make that statutory advance. It was held that in the first case the assessee was being paid interest for making the advance payment and in the second case he is made to pay interest for failure to pay the advance payment. According to the High Court, there was no connection between the two positions and that it is impossible to accept the claim that the two situations are so connected as to constitute one transaction. Another argument based on the contention that both commercially and technically the payment of interest by the Department and the payment of interest by the assessee stand on the same footing was also rejected.

After the decision in the case of Sandvik Asia

Subsequently, the Mumbai Tribunal also, in the case of Lupin Limited v. ACIT [TS-5686-ITAT-2016(MUMBAI)-O], expressed its views that the interest paid under various sections of the Act cannot be reduced from the interest on refund received under section 244A of the Act, either under the head ‘Business’ or IFOS. According to the Tribunal, the conditions of taxability and deductibility, being regulated by law, are paramount, and the identity of the person, whether same or different, is of little consequence in law.

However, it had to follow the earlier decisions of the co-ordinate benches in the cases of Cynamid India Ltd. v. IAC [TS-5354-HC-1991(BOMBAY)-O], Kvaerner Powergas India Pvt. Ltd. v. AdCIT [ITA No. 8914/Mum(B)/2004 dated 10 August 2007] and DIT (IT) v. Bank of America NT and S [TS-6215-HC-2014(Bombay)-O]  relied upon by the assessee.

The Mumbai Tribunal also noted that the only course available to it is to refer the matter to the larger bench of the Tribunal, but did not do so in view of the matter being not of wide import, thus adopting the aforesaid earlier decisions of the Mumbai Tribunal. It also clarified that its opinion in the matter as to the non-deductibility of interest paid, is only for the consideration by the jurisdictional High Court, if and where deemed fit in a particular case - the larger principle involved being: Would the conditions of taxability and deductibility in relation to a particular sum (interest in the present case) obtain even where it becomes both - due from as well as due to, the same party.

Further, despite the above, the Mumbai Tribunal held that the interest paid would be allowed to be set-off against the interest received subject to two conditions. Firstly, as the set-off is premised on a nexus inasmuch as the amount is deemed to and receivable from the same party, implicit therein is the notion of it being for or relating to the same period; and therefore, the set off of interest paid against that received shall be subject to the two being for the same period. Secondly, interest as an expenditure u/s. 57(iii) could only be allowed to the extent of interest attributable to the rate at which interest is received from the Revenue and therefore, the deduction for interest paid would be limited to the quantum of interest received on the like (principal) amount for the same period, defined as from a particular date to a particular date.

Closing Remarks

All in all, while the issue seems to remain unsettled with contradictory decisions of the Tribunals; the decision of the Pune Tribunal in the case of Sandvik Asia (supra) seems to be detailed and well-reasoned, with due consideration of the relevant provisions of the Act as well as the decisions of the Courts. Moreover, the decision of the Bombay High Court in the case of Aruna Mills Limited (supra), though rendered under the 1922 Act, may also hold good in the context of the relevant provisions of the Act. Even the Mumbai Tribunal, in its subsequent decision in the case of Lupin Limited (supra), has expressed a different view (favouring non-deductibility of interest paid) than what was held by the earlier co-ordinate benches in the case of Cyanamide India Limited (supra) and other cases, though it had to follow those decisions based on the principles of jurisprudence.

Accordingly, in the humble opinion of the author, the view that the interest paid under various provisions of the Act cannot be deducted or set-off against the interest received u/s.244A of the Act seems to be the better one for adoption.