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Issues Involved:
1. Whether the interest income could be deducted from the business loss to give a net loss as claimed, or whether the interest income was to be treated as separate and not to be set off. 2. Whether the petitioner was correct in the contention that a complete adjustment and set-off had been granted by the ITO against all the income for 1971-72, including income from other sources. Summary: Issue 1: Treatment of Interest Income for Set-off Against Business Losses The petitioner, an Italian company, contended that excess business funds placed on short-term deposits with banks should be considered business income. The main question was whether the interest income could be treated as business income for the purposes of making adjustments against business losses carried forward from the previous year. The court examined various precedents, including *CIT v. Cocanada Radhaswami Bank Ltd.* and *United Commercial Bank Ltd. v. CIT*, which supported the view that interest income derived from business funds could be treated as business income. The court concluded that the interest income in this case was indeed business income, as the funds were derived from business activities and not mere investments. Therefore, the set-off had to be granted and could not be refused merely because interest income is taxed under a separate head. Issue 2: Adjustment and Set-off by the ITO The petitioner argued that the ITO's assessment order was ambiguous and could be misunderstood to mean that a complete set-off had been granted. The court noted that the ITO's order was terse and not fully comprehensible, but the intention was not to give a set-off of previous losses against interest income. The demand notice issued along with the assessment order clarified the true position, dividing the income into business income and income from other sources and granting adjustment only in respect of business income. The court found no foundation in the petitioner's claim that there was an error in the demand notice. Conclusion: The court allowed the petition, holding that the income from interest on bank deposits is also business income for the purpose of set-off. The court emphasized that the petitioner, engaged in large contracts, would naturally have large liquid funds at times, and earning interest on such deposits would be considered business income. The set-off as claimed had to be allowed even against interest on securities. The parties were directed to bear their own costs. Petition allowed.
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