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Interpretation of section 40A(8) of the Income-tax Act, 1961 regarding the treatment of interest for determining disallowance. Analysis: The case involved the interpretation of section 40A(8) of the Income-tax Act, 1961, concerning the disallowance of interest. The assessee had debited interest but also received interest, leading to a dispute on whether the disallowance should be based on the gross amount of interest or the net amount. The Income-tax Officer disallowed interest on the gross amount, which was upheld by the Commissioner of Income-tax (Appeals). However, the Tribunal ruled that the net amount of interest should be considered for determining the disallowance. The Tribunal based its decision on the relevant provisions of the Act and "broad commercial principles," emphasizing that an assessee's liability should be determined based on actual income without solely relying on book entries. The Tribunal highlighted that the interest expenditure cannot be assessed independently of the interest received, ultimately allowing the appeal filed by the assessee. The High Court referred to a Supreme Court decision in Keshavji Ravji and Co. v. CIT [1990] 183 ITR 1, which interpreted section 40(b) of the Act. Drawing parallels between sections 40A(8) and 40(b), the High Court concluded that the principle established in the Supreme Court case could be applied to the provisions of section 40A(8). Therefore, the Tribunal's decision to consider the net amount of interest for determining disallowance was upheld, ruling in favor of the assessee and against the Revenue. In conclusion, the High Court answered the question of law in the affirmative, supporting the assessee's position. The judgment highlighted the importance of considering the net amount of interest, as per the principles established in relevant provisions of the Income-tax Act and previous judicial interpretations. The case serves as a precedent for similar disputes regarding the treatment of interest under section 40A(8) of the Act.
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