Law:

Section:

Section 57 of the Income-tax Act, 1961 - Income from other sources - Deductions - Assessment years 2005-06 to 2006-07 - Activity of import of gold on 360 days credit against letter of credit was permitted by Government of India as per Import and Export Policy for benefit of exporters - Assessee exporter of jewellery borrowed huge sum from bank and converted same into FDRs - Exporters were benefitted by scheme purely on facts that there was a difference of rate of interest in India as against interest rate outside India which was payable, i.e., LIBOR rate - It was because of this peculiar nature of transaction that assessee earned more interest on FDRs than interest payable to bank on borrowed funds - Assessee claimed deduction of interest paid on loan from interest earned on FDRs - Assessing Officer disallowed same on ground that loan was taken for business purpose and interest thereon should not be netted against interest earned on FDRs but should be allowed as deduction under head 'Income from business' - Whether since there was a clear nexus between interest earned on FDRs and interest paid on loan utilized for purchase of FDRs, interest paid had to be allowed under section 57(iii) as amount was borrowed for earning income taking advantage of exim policy and lower LIBOR interest rate - Held, yes [In favour of assessee] FACTS The assessee, an exporter of jewellery, borrowed huge amount of loan and converted same into FDRs. Interest earned on said FDRs being more than the interest paid on the loan, interest on loan was reduced from interest on FDRs, and income was shown under the head 'Income from other sources' and deduction was claimed accordingly. However, the Assessing Officer had disallowed same on the ground that the loan was taken for business purpose and interest thereon should not be netted against interest earned on FDRs but should be allowed as deduction under the head 'Income from business'. The assessee appealed against the said order before the Commissioner (Appeals) who deleted the addition and allowed the deduction under section 57(iii). Said order had been confirmed by the Tribunal. On further appeal: HELD The assessee had explained before the…

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