Commissioner of Income Tax vs Punjab State Warehousing Corporation

J.S. Khehar, J.—The respondent-assessee is primarily engaged in the activity of letting of godowns or warehouses for storage. Insofar as, the assessment year 1990-91 is concerned, income in respect of the aforesaid activity was exempt u/s 10(29) of the Income Tax Act, 1961 (hereinafter referred to as the ''1961 Act''). Section 10(29) of the 1961 Act, is being extracted hereunder:

10(29) In the case of an authority constituted under any law for the time being in force for the marketing of commodities, any income derived from the letting of godowns or warehouses for storage, processing or facilitating the marketing of commodities.

The issue which has come up for adjudication before us is in respect of income from another allied activity being carried out by the respondent-assessee. The respondent-assessee has adopted a policy of extending loans to its employees. These loans are extended to enable the employees to purchase houses and motor vehicles. The respondent-assessee charges interest on the aforesaid loans extended to the employees. The income from the allied activity referred to above, is the interest income aforesaid. The sole issue which has arisen for consideration before this Court is, whether the interest income derived by the respondent-assessee can be set off as against the interest paid by the respondent-assessee for taking a loan from the NABARD.

Before we embark on the proposition noticed in the foregoing paragraph, it is essential to record a finding on a related aspect of the matter, namely, whether the instant income derived out of interest by the respondent-assessee falls within the purview of Section 57 of the 1961 Act (i.e., income from other sources). The Commissioner of Income Tax (Appeals), adjudicated upon the controversy by an order dated 25-9-1991, wherein it was held that the instant income of the respondent-assessee derived by way of interest, was income from other sources. This determination at the hands of the Commissioner of Income Tax (Appeals), was upheld by the Income Tax Appellate Tribunal, vide its order dated 17-5-2000. The orders passed by the Commissioner of Income Tax (Appeals) dated 25-9-1991, as well as, the order passed by Income Tax Appellate Tribunal dated 17-5-2000, are not subject-matter of challenge at the hands of the respondent-assessee. In the aforesaid view of the matter, we have no hesitation in concluding, that the respondent-assessee had accepted, that the income derived by the respondent-assessee as interest by extending loans to its employees, is income from other sources falling u/s 57 of the 1961 Act.

Having arrived at the aforesaid conclusion, the next question to be settled is, whether the component of income earned by the respondent-Corporation can be subjected to tax. If so, whether in computing the liability of the respondent-Corporation, the interest income earned by it can be set off against the interest being paid by the respondent-assessee to the NABARD.

The relevant provision which has been invoked by the respondent-assessee to escape from the said liability of tax, is Section 57(iii) of the 1961 Act. The aforesaid provision is being extracted hereunder:

57(iii) any other expenditure (not being in the nature of capital expenditure) laid out or expended wholly and exclusively for the purpose of making or earning such income.

In our considered view, the term "purpose" referred to in Clause (iii) of Section 57 of the 1961 Act, for the present controversy, is relatable to the activity of the respondent-assessee in earning income by extending loans to its employees. Insofar as, the deduction conceived of under Clause (iii) of Section 57 of the 1961 Act is concerned, the same is relatable only to expenditure incurred for the said "purpose". It is not the case of the respondent-assessee, and in fact cannot be its claim, that the interest being paid by the respondent-assessee to the NABARD is an expenditure incurred by it for the "purpose" under reference. Thus viewed, we are satisfied that the respondent-assessee cannot be allowed to set off the interest income being derived by it for the welfare of the employees engaged by it as against the interest being paid by the respondent-assessee to the NABARD.

In view of the above, we are satisfied that the set off allowed by the Income Tax Appellate Tribunal, dated 17-5-2000 was wholly unjustified, being beyond the scope of Section 57 of the 1961 Act. The instant appeal, accordingly, stands allowed in the aforesaid terms.

The following substantial question of law arose for adjudication in the present appeal:

Whether on the facts and in the circumstances of the case Hon''ble ITAT is right in law in allowing interest paid by the Corporation is eligible for deduction u/s 57(iii) against the interest on advances received when no direct nexus can be established between the amounts for interest payment and interest received?

The aforesaid question of law is answered in favour of the revenue.