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Issues Involved:
1. Whether netting between the interest income and the interest paid on borrowings is permissible when the interest income is considered under the head "income from other sources". Summary: Issue 1: Netting Between Interest Income and Interest Paid on Borrowings The appeal was originally disposed of by the Tribunal on February 10, 1999. The revenue filed a miscellaneous application u/s 254(2) of the Income-tax Act, stating that the issue of netting between interest income and interest paid on borrowings, when the interest income is considered under the head "income from other sources," was not adjudicated. The Tribunal recalled its original order on this limited issue and both parties were heard. The learned Senior Departmental Representative argued that u/s 57(iii) of the Act, only those expenditures laid out or expended wholly and exclusively for the purpose of making or earning such income are deductible from the interest income. He contrasted this with section 36(1)(iii) of the Act, which allows deduction of all interest paid in respect of capital borrowed for business or profession. He cited several judgments to support his contention, including Madhav Prasad Jatia v. CIT, Karnataka Forest Plantations Corpn. Ltd. v. CIT, and Tuticorin Alkali Chemicals & Fertilizers Ltd v. CIT. The learned counsel for the assessee argued that netting should be allowed between the interest income and the interest paid on borrowed capital invested for earning interest income. He contended that the view in Tuticorin Alkali Chemicals & Fertilizers Ltd was reversed by the Apex Court in CIT V. Bokaro Steel Ltd. He distinguished the cases cited by the DR, stating that in those cases, the business had not commenced, unlike the present case where the business had commenced. The Tribunal examined the relevant provisions and judicial pronouncements. It noted that u/s 36(1)(iii), interest paid on borrowed capital is deductible while computing income from business or profession, whereas u/s 57(iii), only expenditures wholly and exclusively for earning income from other sources are deductible. The Tribunal referred to the judgments in Madhav Prasad Jatia, Karnataka Forest Plantations Corpn. Ltd, and Amritaben R. Shah, which emphasized that deductions u/s 57 are allowable only if they fall within the clauses enumerated in that section. The Tribunal also considered the judgment in Tuticorin Alkali Chemicals & Fertilizers Ltd, which held that interest earned on surplus funds is of revenue nature and taxable accordingly. It noted that the judgment in Bokaro Steel Ltd did not reverse the principle laid down in Tuticorin Alkali Chemicals & Fertilizers Ltd but dealt with capitalizing interest incurred before the commencement of production. The Tribunal concluded that while computing income under the head "income from other sources" u/s 56, only deductions enumerated u/s 57 are allowed. The borrowed fund was not exclusively for earning interest income but for business purposes. Therefore, netting between the interest received and interest paid on borrowed funds is not permissible. The interest income of Rs. 32,101,74 earned on advances to the sister concern was correctly treated as income from other sources, and the assessee is not entitled to netting. Conclusion: The issue was decided against the assessee, and netting between the interest received and interest paid on borrowed funds was not allowed.
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