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Issues Involved:
1. Claim of deduction u/s 36(1)(viii) for income from investment in co-operatives. 2. Claim of deduction u/s 36(1)(viii) for interest on short-term deposits. 3. Claim of deduction u/s 36(1)(viii) for service charges on SDF loans. 4. Application of the rule of consistency. 5. Alternative claim for netting of interest income. Summary: 1. Claim of deduction u/s 36(1)(viii) for income from investment in co-operatives: The assessee claimed deduction u/s 36(1)(viii) for dividend income from investments in co-operatives. The Assessing Officer (AO) and CIT(A) disallowed the deduction, stating that such income is not derived from long-term finance. The Tribunal upheld this view, referencing the Supreme Court's judgment in Liberty India, which differentiates between income derived from and attributable to a business. The Tribunal concluded that dividend income is attributable to but not derived from the business of providing long-term finance. 2. Claim of deduction u/s 36(1)(viii) for interest on short-term deposits: The assessee argued that interest from short-term deposits should be eligible for deduction u/s 36(1)(viii) as these deposits were made from funds received from long-term loans. The AO and CIT(A) disallowed the deduction, and the Tribunal agreed, citing that such interest income is not derived from the business of providing long-term finance. The Tribunal emphasized that the source of funds does not change the nature of the income. 3. Claim of deduction u/s 36(1)(viii) for service charges on SDF loans: The assessee claimed deduction for service charges on SDF loans, asserting that these loans are long-term and related to the business of providing long-term finance. The AO and CIT(A) disallowed the deduction. The Tribunal upheld this decision, stating that service charges are attributable to but not derived from the business of providing long-term finance, as the financing is done by the Government and not the assessee. 4. Application of the rule of consistency: The assessee argued that similar deductions were allowed in earlier years, invoking the rule of consistency. The Tribunal noted that the provisions of section 36(1)(viii) were amended from the assessment year 1996-97, and the department had taken corrective actions in subsequent years. The Tribunal rejected the assessee's claim, stating that the department's inability to reopen earlier assessments due to the expiration of the limitation period does not preclude it from correcting mistakes in subsequent years. 5. Alternative claim for netting of interest income: The assessee contended that if interest income from short-term deposits is excluded, only the net interest income after deducting related interest expenditure should be excluded. The Tribunal agreed with this contention, directing the AO to allow netting of interest income to the extent the assessee can establish a direct nexus between interest expenditure and interest income from bank deposits. The Tribunal referred to the Delhi High Court's judgment in Shri Ram Honda Power Equipment for guidelines on netting interest. Conclusion: The appeals were partly allowed for statistical purposes, with the Tribunal directing the AO to reconsider the netting of interest income based on the established nexus.
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