COMMISSIONER OF INCOME TAX CENTRAL I NEW DELHI vs. J B ROY

(f { * IN TIIE HIGH COURT OF DELIII AT NEW DELHI Date of decision: 30th Novemb er.2012 + ITA 546/2010 + IT A 942t2010 COMMISSIONER OF INCOME TAX CENTRAL I NEW DELHL.... Appellant Through: Mr. Kamal Sawhney, Sr. Standing Counsel. versus J B ROY ..... Respondent Through: Mr. Percy J. Pardiwalla, Sr. Advocate with Mr. Satyen Sethi and Mr. Arta Trana Panda, Advocates. CORAM: MR. JUSTICE S. RAVINDRA BHAT MR. JUSTICE R.V. EASWAR R.V. EASWAR.J: (OPEN COURT) For orders see ITA 258/2010. i lrt Hlr,r-<'. R.V.EASWAR, J I;be^r, S. RAVINDRA BIIAT. J NOVEMBER 30, 2012 Bisht ITANos.546 &942of2Q10 Page I of I 2012:DHC:7824-DB

i 7.o r'\d IN TIIE HIGH COURT OF' DELTII AT NEW DE,LHI Date of decision: 30th Novemb er.2Ol2 + ITA2s8/20t0 COMMISSIONER OF INCOME TAX ..... Appeltant Through: Mr. Kamal Sawhney, Sr. Standing Counsel. versus UK BOSE Through: Mr. Percy J. Pardiwati;, tfX;**: with Mr. Satyen Sethi and Mr. Arta Trana Panda, Advocates. + ITA s46/20r0 + ITA94212010 COMMISSIONER OF INCOME TAX CENTRAL I NEW DELFII ..... Appellant Thlough: Mr. Kamal Sawhney, Sr. Stancling Counsel. versus J B ROY .... Respondent Tluough: Mr. Percy J. pardiwalla, Sr. Advocate with Mr. Satyen Sethi and Mr. A"r1a t Trana panda, Advocates. v CORAM: -\ MR. JUSTICI, S. ITAVINDRA I}HAT MR. JUSTICE TT.V. EASWAR R.V. EASWz\trI,J: (OI,EN COIJIIT) ITA Nos.258, 546 &.942 of 2010 Page I of 18 ' 'I I I t i ; 2012:DHC:7824-DB

r )4 'Thecofirmonquestionoflawwhicharisesinallthetlu.eeappealsbythe revenue relates to the assessment of the perquisites in the hands of the respective assessees. In ITA No.94212010 the sUbstantial cluestion of law is as under:- ' t'. t. a ,,(i) whldther the Inconre Tax Appellate Tribunal was correct tn law in deleting the addilion of 3'37'0?5/- nmde by the AO on account of perrytisites u/s 2B(v) of the Act? 2,InlTANo.546l2}l0thesubstantialquestionoflawisasunder:- ',,(i) Wherher the Income Tax Appeltate Tribunal was correct in \, Iatrt in deleting the addition of {6'29'3!6/- nrude by the AO on , account of perquisites u/s 2B(v) of the Act? 3: In ITA No.258/2010 the substantial question of law is as under:- *(i) whether the ITAT wos correct in law in deleting the addition ntadebythteAssessingofJiceronaccountofperE'tisitevalueinthe hands of assessee? 4. We may first take up ITA No.258/2010, in which the assessee is one U.K.Bose. He at the relevant time was an employee of M/s Sahara Airlines Ltd. In respect of the assessment year 2000-01 the assessing officer noticed in the course of the assessment proceedings that the assessee was provided with \ several perquisites by his employer. They were in the shape of credit card expenses, club partnership expenses, expenses on domestic servants, expenses on security guard, chauffer driven car, telephone/cell phone expenscs? electricity expcnses etc. He considered these' expenses incurred by the employer.companyasperquisitesarisingoutofemploymentandtaxableunder ITA Nos.258, 546 &' 942 of 2010 Page 2 of 18 2012:DHC:7824-DB

r{ Section 17 of the Act. He <2,94,843/- to tax as under:- accordingly brought y> the aggregate amount of Credit Card expenses Chft MenftershiP Dontestic Servant Security gttards Chatffitr Driven car Te lephone/ 9e ll expense s Electricity Expenses Conveyance 6 I 9 I0 II i I2 I3 86,363 20,000 24,000 2,880 90,000 50,000 I2,000 9,600 @ .*/ 5 5. On appeal the ClT(Appeals), following his earlier orders, deleted the entire amount of 72,94,8431- on the ground that the addition was made on hypothetical and estimated basis. The Revenue carried the matter in appeal before the Income Tax Appellate Tribunal ('Tribunal' for short) in ITA No.l502lDe1/2008. The Tribunal accepted the ground and noted that in the appeal of the Revenue for the assessment year 1998-99 in ITA No.l500/D ell}008, it had by order dated 17tr'April, 2009 held that the assessee was not provided with any accommodation by his employer, that no furnitule or security guards or cooks were provided to him and that the telephone was provided by the firm by name IWs Sahara India Mass Communication, in which the assessee was a parlner and that considering all these circumstances the ClT(Appeals) had rightly deleted the perquisites brought to assessment by the assessing officer. Following its earlier order, the Tribunal took the same view holding as follows:- "In lhe present perquisite value ITA Nos.258, 546 & 942 of 201 0 case we find that the additions in respect of were towards electricity expenses, rent free Page 3 ot 18 2012:DHC:7824-DB

>9 acconmxodation, vdlLte of dOmeSlic Sentant, Seanrity gttard, telephone at residence, ihou6"' driven car' other antenities' club mentbership and in resiict of foreign travel undertaken by the assessee. However, we find. that all these additions werb ttwdbwithott'ttfindingthattheconxpanyhasincurredsuch expenses by ,riy of providing perEtisite to the asses'see -and nol incurredbytheconxpanyinthecourseofcarryingonbusiness, The additions were irade on estirnate basis' Since tlry facts ar3 identical in the case of the assesseefor Assessntent Year 1998-99' we do not fnd any infirntity in the order of the learned CIT (A)' " 6. . we have considered the matter in the light of the rival contentions' The Tribunal has recorded a finding of fact that the company which employed the assessee did not incur any such expenses for providing these perquisites to the assessee and that the additions were made only on estimate. There is no material before us to show that the finding of fact recorded by the Tribunal is conflary to the record or is untenable. We accordingly answel the substantial question of law in the affirmative, in favour of the assessee and against the revenue. 7. so far as the ITA No.9 42 &, 546120L0 aIe concerned, they relate to the assessee by name J.B. Roy, for the. assessment years 20aI-02 and 2000-01 respectively. In respect of these years, the assessee was a partner of M/s Sahara India a'd director in various companies of Sahara Group. He was drawing salary fi-om M/s Sahara India Mass communication. ln the assessments the assessing officer added the perquisite value on account of provision of security guards and gardener to the assessee in the amount of 77,37 '0251- fot the assessment year 2O0l-02. The value of perquisite on account of provision of chauffer driven car was taken at {2 lacs. The other perquisites assessed were ITANos.258, 546 &942 of 2010 Page 4 of 18 qE, i . I I I I I t q n ti fl ,t i,l r :li ;1i IItl *iilrt' IL :l J :l .. I iI 2012:DHC:7824-DB

{2,11,5001- for domestic setvants, {5,000/- for gas and water charges and <1,24,0691- for telephone expenses. The value of perquisites on account of security .gualds and gardener was assessed'under Section zQQ$v) and the perquisites aggregating to <5,40,569/- was assessed.under. Section 28(v) since these were provided by M/s Sahara India Finance Corporation which was the assessee's employer. 8. On appeal the CIT (Appeals) deleted the addition on account of perquisites whose ordel'was confirmed by the Tribunal. g. In respect of the assessment year 2000-01, the position is the same except for variations in the amount of perquisites added' 10. We have considered the facts in the light of the arguments addressed before us. The findings recorded by the Tribunal are findings of fact. So far as . the salaries paid to security guards, servants and gardener are concemed, they have been found debited to the account of the assessee in the books of the firm M/s Sahara India and, therefore, there is no question of perquisites. Similarly, it ,has been found by the Tribunal that the rent was paid by the firm in respect of the property which was not owned by the firm and, therefore, there was no concession in the matter of either rent or fiunitule and fixtures. Considering these findings of facts, we see no reason to interfere with the orders of the Tribunal in these two appeals so far as the issue of percluisites is concerned. Accordingly the first substantial questions of law in these two appeals are answered in the affirmative, in favour of the assessee and against the Revenue. ITA Nos.258, 546 &942 of 2010 Page 5 of 18 \-i'/ ,{J 2012:DHC:7824-DB

P i I I It' ti :i I i ' Tt 11. The second substantial question of law J.B.Roy is:- 12. ,,(tt) Whether the Income Tax Appellate Tribunal was correct in law ii attowing dedttction of {3,8i,000/- to the assess'-under Section 10(l3A) of tnu Actfor the assessnxentyear 2001-02?" In respect of the other assessee, cluestion of law is the same but the in these two aPPeals relating to arnount involved rs {2,31,000/-. In the returns the assessee had plairned d'eduction under Section 10(134) on the basis of the rent paid by him which has been debited from his salary directly. This section exempts any special *-f allowances specifically granted to an assessee by his employer to meet expenditure actually incurred on payment of rent for residential accommodation occupied by the assessee, to such extent aS may be prescribed, having regard to the area in which the accommodation is situated and other relevant considerations. Rule 24 of the Income Tax Rules prescribes the quantum of exemption available. The reason why the assessing officer disallowed th'e claim for'exemption is that he considered the salary received from M/s Sahara India lytuss communication not under the head "salaly" but under the head "income fi-om other soulces". The reasoning of the assessing Officer as contained in the assessment order for the assessment year 200|-02 is as under:- ,,8. The assessee has disclosed inconte front salary received from M/s. sahara India Mass Conmrunication antounting to " 5,16,000/-. The assessee has clainred deduction t'/s I0(l3A) at 8,84,000/- on the basis of rent paid by him which has been debitedfront his salary directly' ITA Nos.258, 546 & 942 of 2010 Page 6 of 18 2012:DHC:7824-DB

"{* B.lltlsnoredtharthepronloters(SrisubratoRoy,the assessee and Sri O.P. Srivasia) have devised a system by which they are drawing salary froni sonxe concern' perquisite fr.ont '.')rirl"li ilr. The vhole systetn works in a fashion that their ' p,riti""trU ?o*rity needs are being taken care of by the variotts concerns tvithout their showing the value as incorue (partly or wholly)andpayingtaxonit.Itisevidentthatthisprivileged treatnrcnt is reieivid by theru by virtue of their overall position in the group and. particular position in the respective firnts/ _ cotlxpanies in which they are partners/ directors. Here it is also '' ii poi"t or'il that last year his enryloyer has given hint a gross ,oiory of t16,89,000/: but during the year under consideration the sllary of the assessee has incieased more than double withottt any special reason, or gain to company Ihis also proves that the assessee is" eniiy,ing tie benefit of his position in the group and drawing the iaiary" what he irori. In view of the aforesaid, the inconrc" of ?i.5,16:000/- disclosed by the dssessee from salary.is. being rriated as income within the nteaning of section 2Qa)(iv) and assesser| under the head ,incolne from olher Sources,. The claimofexenrytionu/sI0(13A)i's'accordingly'notbeing allowed." 13. on appeal the cIT (Appeals) following his earlier orders directed the assessing officer to allow the exemption. The revenue canied the mafler in appeal to the Tribunal. The Tribunal following its order for the assesslnent yeal' Iggg-2000 affirmed the decision of the CIT (Appeals)' 14. we have consiclered the issue in the light of the rival contentions' The ground on which the claim for exemption under Section 10(13A) was rejected by the assessing officer was that the salary receipts by the assessee from IWs sahara India Mass communication cannot be assessed under the head "salary", but should be assessed under the head "income fi'om other sources"' The assessing officer has howevcr not brought any material to show that the lIANos.258, 546 &942 of 2010 Page 7 of 18 2012:DHC:7824-DB

F j \. L-) relationship between the Iws Sahara India Mass communication and the assessee was not that of a master and servant. He has referred to some extraneouS material to hold that the salary receipt should be assessed as income fiom other Sources. Unless there is material to show that there was no employer-employee relationship, the pfoper head of incomb to be applied is that of "Salary". Since this is not the case of the assessing officer, we are of the view that the Tribunal was right in holding that the assessee was entitled to the exemptioq under Section 10(13A). In this view of the matteJ, we answer the seconcl substantial question of law in these two appeals in the affirmative' in favour of the assessee and against the revenue' 15. That leaves us with the second substantial question of law in ITA No.258/2010 which is as under: - (i, whether the ITAT wds correct in law in deleting the addition 'oi tlO,12,529/- nnde by the assessing fficer o.n account of interest paid by the assessee on loan taken for ptrchase of an exempted qsset? " We may notice the facts giving rise to the question' The assessee received interest of {17,87,4261- fi'om Sahara India Commercial Corporation Ltd' (SICCL) against which it claimed deduction of {10,12,5241-, being interest paid to the same entity i.e. sICCL and declared the net interest ofTT'74,8971- as his income. The income was shown under the head "income from other Sources"' The assessing officer called upon the assessee to explain the claim fol deduction of the interest. In response thereto the assessee wrote a letter ort I1.10.2002 as follows: IIANos.258, 546 &.942 of 2010 Page 8 of 18 I ; I.t I Ill |: il1l t1 rl i{,i il ri ll 2012:DHC:7824-DB

,f "During lhe yedr assessee has received interest from Sahara India cial Cor ion Limited in r to them against which the sales proceeds were received lute and on the other hand has also oaid interest on the loqn obtained earlier for the purchose of the said land. The dffirence of the, sante has also been offered for the assessnrcnt in the revised return. The assessee was under wrong intpression that since the sale of land was not taxable receipt in the hatrd of the assessee' it was presumed that the interest element also was not taxable and obtaining proper legat advise, lhe sanrc is being olfered for assesstnenl... .." 16. After considering the reply, the assessing officer called upon the assessee to explain why the interest paid to SICCL should not be disallowed. The assessee replied as under: " .....As regarcls inlerest paynxent to SICCL), the sante is a fitlly allotvable rkedttction as it directly relates to the interest received by the qssessee on late remittance of the sqle proceeds of lands. If the sale proceeds wor.tld have been received in tinte, the assessee would have paid off the loan taken for the purpose of investment, bttt there was late receipt of sale. proceeds on which interesl has been received by the assessee which is also ffired for assessment and against the Sqnxe interest paid on loan is clainrcd as a deduction as the transaction is interrelated wilh each other. (Jnder the circuntstances interest paynrcnt t.t allowable deduction in the hands of the assessee on the Sanxe footing on.which interest received by lhe qssessee is taxable..' .." It would appear that the interest liabitity h.ad been capitalised towards the actual cost of the land. Therefore, the assessing officer sought clarification as to how the capitalised interest can be allowed to be adjusted against the interest received. The assessee by letter dated 10.2.2003 clarified the issue as follows:- ITA N0s.258, 546 El942 of 2010 Page 9 ot 18 .e- 2012:DHC:7824-DB

\ ((... ... ...No doubt, the interest whichwas payable on the loanfor the purchase of rhe land has been capitalised the cost of the land becar.tse it was a capital asset in the hands of the assessee but yctttr honour will apfreciare that the interest which is being set off 'by the assessee is iibsequent.to the date of sale of the land. we have alreaily explained to your honour in or'r earligr written stbnission thai the interest paynrcnt receivedfrom SICCL is on account of lute remittance of the sale orocqeds of land by them to the assessee In turn, the assessee could square off his loan talcen for fhe purchase of land at a later date and, therefore, the assessie had io poy interest also for the period subsequent fornt the date of sale tiII the date of actual pavment' on the date of sale of the land, the treal.nxent of capitalising interest towards the capital asset has ended as the capital asset remains no nxore in existence' what was due now was the sale proceeds against the land. If the sale proceeds would have been received intnrcdiately, the Lrrrrruu woutd have paid oJf toan taken for the purchase of th.e But since the sale @d n the assessee late.and interest has 'been received by the aSSeSSee on such late remlttance, the interest which has beei paid by the assessee on the loan from the ao!, t the sale titt rhe'date of repayment of the loan is an interrelated transaction tvith each orher and, therefore, the interest which has been paid. is fi.ttty allowable deduction in the hands of the assessee... ..." I7. The assessing officer was of the view that there was no provision in the Act to allow the interest paid against the interest received by the assessee' H; also examined the provisions of Section 57(iii) of the Act and held that the interest liability cannot be clairned as deduction under those provisions' He referred to the judgment of the Supreme Court in CIT vs' Dr' V'P'Gopinathatt l'l'ANos.258, 546 &942 of 2010 Page 10 of 18 2012:DHC:7824-DB

(2001) 248 ITII 449 and, held that the gross interest of t17,87,4261- was assessable to tax aird the same was brought to charge under the head "income from other sorrrcedi': ..:.' 18. on appeal the cIT (Appeals) agreed with the. assessee and directed the assessing officer to allow the interest payment of {10,12,5291- and to assess only tlre balance of 77,74,8971-. His reasoning was like this' The moment the assessee entered into an agreement of sale in respect of the agricultural land, he had a right to receive the sale proceeds fi'om the buyer of the land, who was none other than'the person from whom the assessee borrowed rnonies on interest ior accluiring the land. On the one hand the assessee had the right to receive the monies from SICCL and on the other, he had the liability to pay " interest to SICCL. According to the cIT (Appeals) the two transactions were interlinked and had a direct nexus with each other. If the assessee had received the sale proceeds immediately on transfer of thd land to SICCL, he would have been in a position to also cleal his loan to SICCL and thus there would have been no liability to pay or right to receive the interest. Since both the transactions were closely related to each other, the ClT(Appeals) was of the view that the interest received and the interest paid should be set off against each other and only the balance, being the excess interest of 77 ,74,8971-, eartbe brought to tax under the head "income fi'om other soul'ces". He thus allowed the assessee's appeal on this point' D. The Itevenue can'ied the matter in appeal to the Tribunal in I'tA No.1502/Del/200g. The Tribunal was inclined to view both the transactions as intercorutected. This is what the Tribunal held:- IfA Nos.258, 546 & 942 of 2010 Page 11 of18 \i/ 2012:DHC:7824-DB

t' "10- we have considered the rival subrnissions. The interest paid by the assessee was initially in respeci of loan taken'for purchase of agricultural land. Thus till the land was held by the assessee, the interest there on is not allowable as the same is in respect of agricultural land which is not a capital.asset and no capital gain is chargeable in this respect. However, the interest payable after the land was sold cannot be _considered as for acquisition of any capital asset. The same was in the nature of arnount borrowed. Since the assessee did not receive the sale price of land sold, the assessee could not repay the debt. on the arnount receivable from the person to whom the land was sold, ' the assessee had charged interest and offered the same for taxation. Thus the anxount borrowed can now be attribttted to the loan for financing lhe amount receivable. In such a situation there is a direct nexus behueen the amount borcotued. and the arttounl advanced. In respect of amount advanced the assessee was lo receive the interest. Such interest could not have been received, had the assessee not borrowed. r'herefore, the interest payable on the borowal being in respect of antount advanced on which the interest is received. The assessee was rightly hetd to be eligible for deduction of such interest paid. Accordingly ground No. j in appeals for Assessntent Year 2000-01 and 2001-02 fails.', 20. It is the conectress of the above decision of the Tribunal that is called in question by the Revenue. Strong reliance was placed on the judgm.ent of the Supreme Court in CIT vs. Dr. V.P.Gopinathan (supra). It is submitted that Section 57(111) cannot apply at all and the assessee cannot claim a deduction for the interest paid, since it was not paid for the pu{pose of making or earning the interest received. Relying on the judgment of the Supreme Court (supra) it is contended that even a set off on the principle of real income or any other principle deduction of the interest paid cannot be granted since the transactions IlA Nos.258, 546 & 942 of 2010 Page 12 of 18 2012:DHC:7824-DB

a?/ giving rise to the interest receipt and the interest payment are different fiansactions having no coflrmonality or connection' 21. The contention of the assessee is that the principle of netting or set off would apply since both the transactions are with the same person i'e' SICCL; it is pointed out that, had the SICCL paid the purchase price in time' the assessee could have used the same to repay the borrowing from SICCL which it was deprived of. The interest liability arose only because of the delay in SICCL paying the purchase price and that way the transactions giving rise to the interest receipt and the interest payment was one and the same' This' according to Mr. Pardiwala, the learned counsel for the assessee, affords the nexus or close link between the interest receipt and the interest paymgnt justiffing the adjustment or set off. 22. In support of the submissions, Mr.Pardiwala has placed stlong reliance on the judgment of the Supreme court rn Keshauii Rauii and co' vs' cotrutrissioner of Income-tax (1gg0) 183 ITR page L Reference has also been made to another Supreme Court judgment tn Associated Capsules Pvt' Ltd' v' ACIT, (2012) 343 ITR 89 and a judgment of a Division Bench of this court in CIT v. Shri Ram Honda Power Equip' (2007) 289 ITI? 475 ' 23. It would prima facie appear that the judgment of the Supreme couft in CIT tts. Dr.V.P.Gopinathan (Supra) is against the claim of the assessee but a closer look at the facts shows that the judgment of the Supreme court in Keshauji Rauii & Co. ys. C/7 (Supra) is closer to the assessee's case on principle. In the foriner, the assessee had placed monies in a fixed <leposit with the bank. On the security of the fixed deposit, he took a loan' The interest lTANos.258, 546 &.942 of 2010 Page 13 of 18 ..1 'd .t I I \- 2012:DHC:7824-DB

bt I"' :i rl ,, l i I \',. 3I received on the fixed deposit and the interest paid on the loan were sought to be adjusted against each other and only the net interest whs offered for tax' The assessee did not put his case under Section 57(iii), but relied on the principle of mutual dealings and real income theory. The Supreme Court rejected the claim, holding as under:- "Il was not dispttted, as it could not be, that if the assessee had taken a loan from aiother bank ond paid interest.thereon his real incorne wottld not dintinish to the extent thereof' The only question then.is : tloes it make any"dffirence that he took the loan from the sanxe bank i'" rrnirt he hai pdLed the fixed deposit. 7'here is no dffirence in the eye of the low. The intereit that the assessee received from the bank was inconrc in his hands. It could stand dinilnished only if there was a provision in law which pernits such dintiruilion. There iS none, and' 'therefore, the amormt paia by the assessee as interest on the loan that he tiok from the bank did not reduce his income by ,ry of interest on the fixed deposit ptaced by him in the bank' " The judgment of the Supreme court tn Kes.hauii Rauii (supra) is earlier in point of time and was also rendered by a Bench of equal strength i'e' three Judges. In Keshauii Rauii (supra) the provisions of Section 40(b) of the Acfi came up for consideration. Under this provision, aly interest paid by the firn{ to its partner was to be disallowed and added back to the income of the firm' A whatshoulclbethequantumoftlreinteresttobei firm is both in receipt of interest from the partner on him and also pays interest to him' According to the of interest fi'om the partner had to be ignored and the amount paid by the firm to the parlner had to be disallowed; whereas according to the assessee, both the amounts should be netted and only the excess interest paid, if any, over and above the interest received by the firm, could be ITA Nos.258, 546 &'942 of 2010 Page L4 of 18 question arose as to disallowed, when the monies advanced to Revenue, the receiPt 2012:DHC:7824-DB

tltI f t W: ?r ,a), disallowed. The view of the CBDT in Circular No.33D of 1965 was in accord with the view of the assessee. The Supreme Court was, inter alia, dealing with the argument of the assessee that the interest payable by the firm to the partner and by the partner to tlie firm is of the same nature and both being integral parts of a method adopted by the partners for adjusting the division of the profit, both payments partake of the satne character and in that sense they should be set off against each other and only the net payment should be disallowed. The supreme court opined that this general principle, if found to be departed from under the Income Tax law cither expressly or by necessary implication, carutot be given effect to; but if there is no statutory deparfure, the general principle operating under the general law determining the nature of the legal relationship between the parties can be applied in the interpretation of the provisions of the Act. The position was ultimately summed up as follows:- "How rlo these principles operate on lhe present controversy? It appears to us thal, if, in sttbstnnce, the interest paid by the firm l.o a partner and the inlerest, in turn, received from the parlner are nxere expressions of rhe applications of the funds or profits' of the parlnership andwhich, having regard to the conmtunity of interest of 'the parlners, qre nrcre ttariations of the method of adittstntent of the profifs, there shoulcl be no irnpedinrcnt in treating them as part of the sanxe transaction iJl otherwise, in general law, they admit of being so treated. I'he prottisions of section 40(b) do not exclude or prohibit sttch an approach. If, instead of the transactions being reflected in lwo separate or clistinct acclunts in the books of the partnership, they were in one account, the quantum of interest paid by the firru lo the partner worild, to the extent of the &'awings of the parlner, stand atfenuated. The nrcre fact that the transactions are split into or soread over fivo or nxore accounts should not, by itself, ruake arry I'IA Nos.258, 546 &942 of 2010 Page 15 ot 18 tsrJ. I .; 2012:DHC:7824-DB

{ \_ g w t it, , i,t\ I ir !r,' i1 li ll i' J' dffirence if, otherwise, the substance of the transac'tion is the sanxe. One of the relevant lests wotild be to see whether the funds on which' interest is paid or received partake of the sanxe character." ' Having said so, the Supreme Court referred to the principle of 'set off statutorily recognized in bankruptcy proceedings under Section 46 of the Provincial Insolvency Acq 1920 and Section 529 of the Companies Act, 1956 which provides for "mutual credit" to avoid injustice which would otherwise be caused by compelling a creditor to pay the official assignee the full amount of d'ebt due fi'om him to the insolvent while the creditor would receive qnly a small dividend on the debt due from the insolvent to him under "pari passlt" payment. The concept of set off was held applicable even under the Income Tax Law which identifies the firm as a distinct entity and unit of assessment, having regard to mutuality concept implicit in the dealings between the parhrers and the finn. 24. The netting principle was adopted by a Division Bench of this Court in CIT ts. Shri Ram Honda (supra). That was a case concerning Section 8OHIIC which provides for a deduction from export profits. Explanation (baa) provided for exclusion of certain income which had nothing to do with the expott profit and one such item of income was interest. This Court held that the interest which had to be excluded fi'om the business profits was not the gross amount of interest, but only the net interest after adjusting the expenditure incurred by the assessee to eatrr such interest. There was reference made to the judgment of the Supreme Court in Keshauji Rauji (Supra) and it was observed by this Court in paragraph 51 of the judgment that the.underlying principle of netting would get attracted as no prudent business man would allow taxation of interest income ITA Nos.258, 546 & 942 of 2010 Page L6 of 18 2012:DHC:7824-DB

!I I I W E\<- without the expenditure incurred for earning the same being taken into account' There is also the oveniding principle in tax law that it is not the gross receipt that falls to be assessed but it is only the net income, after all the expenditure to eain the income is deducted, that can be assessed to tax' ,strictly speaking' in the present case it is not a question of any deduction being allowed from the interest receipt; it is really a qrtestion of adjusting or setting off both the interest received and the interest paid, since both have close link or nexus with each other. The Tribunal has recorded a finding that the agricultural land was sold by the assessee rn the month of February , Iggg to SICCL' From the date of sale of the land till the remittance of the sale proceeds the assessee was to pay interest of {10, l2,52gl-on the loan which he had taken for purchase of the land' It is i1 respect of the same period that he was entitled to interest income of <ll,ll,426l-fromSICCL'Hadtherebeennodelay'bySICCLinthe remiffance of the sale proceeds, there would have been no interest liability' The right to receive the interest and the liability to pay interest arose in respect of the same period and out of the same event i.e. non-payment of the sale proceeds in time. Ihe delay in payment of the sale proceeds and the delay in repayment of the borrowing are both intertwined; one gives rise to interest income and the other gives rise to interest liability. We are of the view that this affords sufficient nexus between the two so as to justify the applicability of the princiPle of netting. 25. For the aforesaid reasons, we affirm the decision of the Tribunal on this point and answer the substantial question of law in the affirmative' in favour of the assessee and against the Revenue' ITA Nos.258, 546 &.942 of 2010 Page 17 of 18 P'-j 2012:DHC:7824-DB