TMI Blog2011 (9) TMI 1065X X X X Extracts X X X X X X X X Extracts X X X X ..... essment Year 1994-95 dated 27-9-1998, in I.T.A. No.73/PN/2000 in the assessment year 1995-96 dated 24.5.2000 and in I.T.A. No.580/PN/2000 in the assessment year 1996-97 dated 2.2.2001 wherein at page 11 para 22, page 18 para 6 and page 43 para 22 respectively of the paper book in all these assessment years, the issue of excise duty, sales tax and interest has been decided in favour of the assessee by following the decision of the Tribunal in the case of Sudarshan Chemical Industries Ltd. vs. DCIT (1997) 60 ITD 629. It was further pointed out by the learned Authorised Representative of the assessee that the decision of the Tribunal in the case of Sudarshan Chemical Industries Ltd. (supra) had been affirmed by the Hon'ble Bombay High Court in the case of CIT vs Sudarshan Chemical Industries Ltd. (245 ITR 769). The learned Departmental Representative Shri G.S.Singh also accepted the same. This being so, this part of ground of appeal of the assessee which relates to inclusion of excise duty, sales tax payable and interest in the total turnover of the assessee is decided in favour of the assessee and against the revenue. 4. The other part of the ground of appeal relates to sale o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ouvenirs and other types of expenditure as the expenditure is incurred wholly and exclusively for purposes of business and no part of the expenditure can be disallowed u/s.37(1) of the Income-tax Act, 1961. This view is reinforced by Circular No.200 dated June 28, 1976, issued by the Central Board of Direct Taxes. Sub-Section (4) of Sec.37 of the Income-tax Act, 1961, is no doubt a non-obstante clause, but it is a non-obstante clause vis-a-vis sub-section (1) and sub-section (3) of Sec.37 only. If any expenditure or allowance is allowable under other sections of the Income-tax Act, 1961, the allowance cannot be withdrawn or denied to the assessee because of the prohibitory provisions in Sec.37 (4) of the Income-tax Act, 1961. Therefore, the assessee will be entitled to depreciation on the premises used as guest house. Hence, it was his argument that since the Tribunal has not considered these judgements of the Bombay High Court while deciding the issue, in the present appeal, the Bench should take these decisions into consideration and decide the issue in favour of the assessee. On the other hand, Mr. Singh the learned Departmental Representative argued that as the issues ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... able and is bad. In view of the provisions of Section 36(2) (iii) and (iv) it is imperative for the A.O. to give positive findings, whenever the claim for bad debts is made by the assessee as to which previous year, if any, the debt has become irrecoverable. If the A.O. comes to a finding that it has become irrecoverable in an earlier previous year, which is not beyond the period of 4 years immediately proceeding the previous year of the writing off , the A.O. has to take necessary action u/s. 36(2) (iv) and rectify the assessment of the previous year wherein in his opinion the debt became irrecoverable. If on the other hand, the A.O. comes to a finding that the debt becomes bad in later previous year he shall give the deduction when he makes the assessment for such relevant previous year. In any case, the A.O. has to give a finding as to the year in which the debt has become bad or irrecoverable. 6.9 In the present case the A.O. has not carried out this imperative exercise. Prima facie it is seen that the amounts shown as bad are premature claims since most of the invoices against which the debt is claimed as bad are of the current financial year. However, in the fitness of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... book filed by the assessee it is observed that the details of bad debts was as under: Rs. in lakhs Brought forward 75.38 Bad Debts as per list 41.59 116.97 Less: provision for Bad Debts written back during the year 45.13 Carried forward 71.84 Further, from the details of Misc. expenses of ₹ 414.07 lakhs filed at page nos. 194 and 195 of the paper book it is observed that the assessee has debited ₹ 41.59 Lakhs under the head Provision for Bad Debts and credited ₹ 45.13 lakhs under that head and thus, credited net amount of ₹ 3.54 lakhs under this head and reduced the miscellaneous expenses by amount of this ₹ 3.54 lakhs. From the the details of ₹ 45.13 lakhs as given by the assessee in the above page, it appears that an amount of ₹ 25.25 lakhs was disallowed in the assessment of earlier years and ₹ 19.88 lakhs was allowed as deduction to the assessee in the earlier years. From the ord ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ases net of excise duty and consequently the closing stock inventory is also valued on the same principle. This is in line with the method of accounting recommended by the Institute of Chartered Accounts of India in the guidance note on accounting treatment for MODVAT which has been reproduced by the A.O. in his note as Annexure 'A' of the assessment order. The A.O. found that from the full amount of excise duty of ₹ 9,18,17,000/- was actually paid in cash and for the balance of ₹ 78,89,000/- credit was taken of the MODVAT ingredient in the purchase price. The addition of ₹ 78,89,000/- has been made by the A.O. for the following reasons: (a) Purchase of raw-materials and value of closing stock should reflect the full purchase price inclusive of excise duty paid ; (b) Only the taxes which are paid in cash should be claimed as charged on profits and should be allowed as deduction; (c) MODVAT registers do not/cannot impinge with charge on profits; they are only instruments to determine cash out-go on account of excise duty and they should be used only for that purpose; (d) Income determined in consonance with (a), (b) and (c) above alo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... under: Unit Rate Amount Unit Rate Amount To purchase of raw materials. 100 10 1000 By sales 60 15 900 Less: Stock of raw-materials. 40 10 400 600 To excise duty 60 3 180 To G.P. 120 900 900 If however, the method s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ggested by the ICAI is incorrect because of the alleged bracketing/concealing is also challenged, as the A.O. has failed to appreciate the distinction between the illustration given by him and the facts relating to the MODVAT scheme. It is once again emphasized that under the MODVAT scheme the assessee is entitled to discharge its liability for excise duty claiming credit for the component of excise duty embedded in the purchases. The mode of discharge is wholly irrelevant to the preparation of accounts. In the mercantile system of accounting, full liability for excise duty has to be reflected. It is not the net amount of excise duty, which is debited to the profit and loss account as the purchase cost is debited net of MODVAT. Therefore, there is no instance of Bracketing/concealing the excise duty with any other account. 16. The A.O. has reached this erroneous conclusion because he has confused the system of accounting with the applicability of Section 43B of the Act. The latter is an artificial provision relevant only for the purpose of computation of income under the Act and has no bearing on the preparation of the assessee's accounts. The further objection of the A.O. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... en several illustration in the chart placed before it by both the sides and demonstrated that there are two possible methods of valuation of stock. The first would be the gross method in which the stock is valued at cost price inclusive of the excise duty element. If this method is adopted, then the unconsumed stock also must necessarily be valued in the same manner. The other method is the 'net method' in which the raw material purchased is valued at the actual cost, that is the actual purchase price and, on this, Modvat credit would be available. If this method is to be adopted, then uniformly the same method must be adopted while valuing the unconsumed stock at the end of year. Whichever method one adopts, the result would be the same. We are unable to accept the view of the A.O. that merely because Modvat credit is an irreversible credit available to the manufacturers upon purchase of duty paid raw material, it would amount to income which is liable to be taxed under the Act. Hence, observing thus, the Hon'ble Supreme Court held that the High Court has correctly appreciated the argument and rendered the judgement which is unexceptionable and hence dismi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tock of manufactured goods has to be decided. He observed that in the case of British Paints Ltd. (supra) the question was the method of valuation of finished products on the basis of cost of raw material altogether excluding the overhead expenses. In his opinion, it was held therein that the assessee had neither followed the 'direct cost method' nor any other method which took into account the actual or even part of the cost involved in the manufacturing of goods in process and finished products. In that case, the Hon'ble Supreme Court upheld that in any system of accounting which excludes in the valuation of stock-in-trade all the costs other than the cost of raw material for the stock-in-trade, is likely to result in a distorted picture of the true profits of the business. Thus, the Hon'ble Supreme Court approved 'the direct cost' method of valuation of finished goods. There is no specific reference to the status of excise duty liability in the valuation of finished goods. 23. The view of the learned CIT(A) is that excise duty is levied on the manufacture or production of goods and is related to the stage after completion of the manufacturing or produc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ower authorities. The learned Departmental Representative supported the order of the A.O. and reiterated the arguments detailed in the assessment order and on the other hand, the learned Authorised Representative of the assessee relied on the order of the CIT(A). We find that it is an argument of the learned Authorised Representative of the assessee that- (a) assessee has been valuing the closing stock at the end of the year on the basis of direct cost method from assessment year 1970-71 onwards without considering excise duty. (b) The CIT initiated action u/s. 263 of the Act for the assessment year 1979-80 and 1980-81 and inter alia, directed the A.O. to consider whether excise duty should be included in the inventory valuation. After examining the issue, the A.O. accepted the method of valuation adopted by the assessee and no addition was made to the closing stock. (c) In assessment year 1989-90, the issue was once again examined by the A.O. Based on the fact that the method of accounting adopted by the assessee was consistent and accepted after examination in the years 1979-80 and 1980-81, the A.O. accepted that excise duty is to be treated as a period cost. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ring or production of goods and is a post-manufacturing expense (Saraswati Industrial Syndicates Ltd. (AIR 1975 SC 460). Excise duty cannot be treated as a cost of manufacturing or production. Therefore, it is not necessary for the assessee to include the same in determining the value of its closing stock. (k) If element of excise duty is included in the valuation of closing stock, the same would have to be given as a deduction for computing the assessee's income by virtue of Section 43B (Lakhanpal National Ltd., 162 ITR 240). (l) In any case, the decision of the Special Bench of the Tribunal is binding on authorities subordinate to the Special Bench as held by the Bombay High Court in C.D.Thandani vs. Universal Ferros and Allied Chemicals Ltd. (172 ITR 30). 25. After considering the rival submissions we find that though the assessee has debited the excise duty on unsold closing stock in its profit and loss account, but has not taken the same in the valuation of the closing stock. In view of the decision of the Hon'ble Supreme Court in the case of British Paints Ltd. (188 ITR 44) to the effect that if the consistently followed system of valuation of closing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ies but especially and properly speaking there can be only one account between the two parties. It is argued that the interest received by the assessee on delayed income-tax refund has been brought to charge and properly speaking can be brought to charge only under the head other sources . It is submitted that in the circumstances, that will be proper to set off the interest paid of ₹ 1,37,2221/- against the interest received of ₹ 45,90,876/-. After considering the totality of the facts of the case, we find that there is merit in the submission of the learned Authorised Representative, Shri J.D. Mistry that between the two parties there can be only one account. Proceedings on this basis, one has to consider the net interest received by the assessee as assessee's income. Hence, we uphold the order of the learned CIT(A) and dismiss this ground of appeal of the Revenue. 28. Ground Nos. 5 and 6 are general in nature and requires no adjudication. 29. In the result, the appeal of the assessee is partly allowed and that of the Revenue is partly allowed. Dinesh K. Agarwal, Judicial Member:- 19 November 2003 1. After discussion twice with the learned Account ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The learned Departmental Representative, Shri G.S. Singh, C.I.T. Departmental Representative, submits that the interest paid on delayed payment of income-tax is not allowable as a business expenditure and, therefore, the CIT(A) has erred in allowing the same with direction to tax only net interest. He, therefore, submits that the addition made by the A.O. be restored. 5. On the other hand, the learned A/R of the assessee, shri J.D. Mistry, while strongly supporting the order of the CIT(A) submits that there cannot be more than one account between the two parties. The assessee has rightly set off the amount of interest paid to the Income-tax Department from the amount of interest received on delayed income-tax refund. He, therefore, submits that there is no error in the order of the CIT(A) on this account and, therefore, the ground taken by the Revenue be rejected. Reliance was placed on the decisions of the Tribunal in the case of R.N.Aggarwal vs. ITO, ITAT, Delhi Bench and in the case of Cynamide (India) Ltd. vs. ITO, ITAT, Bombay Bench. (supra) 6. I have carefully heard the rival submissions of the parties and perused the material available on record including the decisions ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ld stand diminished only if there was a provision in law permitting such diminution. There was no such provision of law and the interest on the loan taken from the bank did not reduce his income by way of interest on the fixed deposit. 8. The assessee has claimed the deduction of interest on the basis of the two decisions of the Tribunal, namely:- 8.1. In the case of R.N. Aggarwal vs. I.T.O. in ITA Nos.3913 and 3914 (Del) of 1980 and 620 (Del) of 1981 dated 21st. August, 1981 it was held that the interest received and paid are to be assessed under the head income from other sources . It was also held that the real income from interest had to be determined in this manner and to be considered while making the assessment. If the issue was considered from this angle, it would be immaterial whether the interest paid u/s. 220 (2) was or was not deductible u/s. 28(1) or u/s. 57 (111) of the Act. Hence the interest paid u/s/220 (2) should have been adjusted against the interest received u/s. 244 and only this net amount should have been taxed. 8.2. In the case of Cyanamid India Ltd. vs. I.T.O. in ITA No.4561(Bom)/1982 dated 23-05-1984 for the assessment year 1978-79 the assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ctions 28 and 37. 14. In the case of CIT vs. Ghatkopar Estate and Finance Corporation (P) Ltd. (1989) 177 ITR 222 it is held by the Hon'ble Bombay High Court that the interest paid by the assessee on delayed payment of income-tax is personal and the interest cannot be allowed as deduction under the provisions of sections 28 or 37 of the Act. 15. In the case of Assam Forest Products (P) Ltd. vs. CIT (1989) 180 ITR 478 it was held by the Hon'ble Gauhati High Court at page 478 (short notes) that:- .......Interest paid has to be regarded as part and parcel of the liability to pay tax. Since any sum paid on account of tax is not deductible under section 40 (a) (11), interest paid under sections 139, 215 and 217 are also not deductible as business expenditure. 16. Recently in the case of Parshuram Agarwalla vs. CIT (2003) 184 CTR (Gau) 82, the Hon'ble Gauhati High Court in Income tax Appeal No.22 of 2001 vide its judgement dated 28-4-2003 on the following question (as referred in para 3 of the said judgement). The real question requires determination by us is, whether the interest paid on the income tax can be said to be a part and parcel of the Income T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ITA Nos. 240 and 241/Gau/1999; Asst. yrs. : 1993-94 and 1994-95 DINESH K. AGARWAL, JUDICIAL MEMBER AND N.S. SAINI, ACCOUNTANT MEMBER 31/01/2003 For the Petitioner : P.K. Choudhury For the Respondent : V.K. Bhatra ORDER Dinesh K. Agarwal, Judicial Member:- 1. These two appeals preferred by the Revenue are directed against the separate orders of the CIT(A) dt. 20th Jan., 1999 for the asst. yrs. 1993-94 and 1994-95. Both these appeals are disposed of by this common order for the sake of convenience. 2. At the outset the learned Departmental Representative submitted that in the case for the asst. yr. 1993-94 the tax effect is less than ₹ 25,000 therefore, it is covered by the CBDT Instruction No. 1903, dt. 28th Oct., 1992 and accordingly the case may be decided in the light of the said instruction. 3. However, we find that the cumulative effect of tax in ground Nos. 1 and 2 of this appeal is more than ₹ 25,000 therefore, the plea of the learned Departmental Representative cannot be accepted and accordingly the learned Departmental Representative was directed to argue the case on merits. 4. Ground No. 1 in t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... interest should be charged on the returned income and not on the assessed income. He further submitted that the decisions relied on by the learned CIT(A) are distinguishable in as much as the case reported in Uday Mistanna Bhandar and Complex vs. CIT (1997) 137 CTR (Pat) 376 : (1996) 222 ITR 44 (Pat) has been referred to a Larger Bench of the Hon'ble High Court and the other two cases reported in CIT vs. Namdang Tea Co. India Ltd. (1994) 116 CTR (Gau) 420 : (1993) 202 ITR 414 (Gau) and CIT vs. Wiliard India Ltd. (1993) 202 ITR 423 (Cal) are on the interest chargeable under s. 215 whereas in the assessee's case the interest was charged under s. 234B. He, therefore, submitted that the order of the AO should be restored. 10. On the other hand, the learned Authorised Representative of the assessee while strongly relying on the order of the CIT(A) submitted that the assessee's case is for the asst. yr. 1993-94, therefore, the law applicable for the asst. yr. 1993-94 should be applied in the assessee's case and not the law which was substituted by the Finance Act, 2001, with retrospective effect from 1st April, 1989. He therefore, submitted that the order passed by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... me from other sources and it is not treated as income from business and there is no dispute on it. Now we have to consider as to whether the payment of interest of ₹ 49,339 on income-tax is allowable as deduction under s. 36, s. 37 or under s. 57 of the Act or not? Since the interest income was assessed as other sources, therefore, the deductions which are allowable under s. 57 can only be allowed. Since neither the assessee has claimed the deduction of such interest under s. 57 nor there is any provision under s. 57 to allow such interest therefore deduction of such interest cannot be allowed under s. 57 or under s. 57(iii) of the Act. This view finds support from the decision of the Hon'ble Supreme Court in the case of CIT vs. Dr. V.P. Gopinathan (2001) 166 CTR (SC) 504 : (2001) 248 ITR 449 (SC) in which it was held at p. 449 (short note) as under:- Held, that the interest that the assessee received from the bank on the fixed deposit was income in his hands and it could stand diminished only if there was a provision in law permitting such diminution. There was no such provision of law and the interest on the loan taken from the bank did not reduce his income by wa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... C) and in the case of Smt. Tej Kumari and Ors. vs. CIT (2000) 164 CTR (Pat)(FB) 201 : (2001) 247 ITR 210 (Pat)(FB) the interest charged by the AO without any specific order should be deleted. He also relied on the decision reported in CIT vs. Kishan Lal (HUF) (2002) 258 ITR 359 (Del) in support of deletion of interest. 21. We have carefully considered the rival submissions of the parties and perused the material available on record. We find that at this stage the learned Authorised Representative of the assessee has taken a new argument which was not taken before the CIT(A). However, in the case of Moti Ram vs. CIT (1958) 34 ITR 646 (SC) their Lordships of the Hon'ble Supreme Court have held that in the matter of granting permission to an appellant for the first time to take up a new ground or raise a new question, the Tribunal has full jurisdiction to grant or refuse such permission. The Hon'ble jurisdictional High Court in the case of Assam Co. (India) Ltd. vs. CIT (2002) 176 CTR (Gau) 406 : (2002) 256 ITR 423 (Gau) has considered a similar issue at length and at p. 439 it was held:- We are therefore of the view that it is permissible on the part of the Tribuna ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tal income of the assessee should be net interest received from the Income-tax Department i.e. ₹ 44,53,655/- or the gross interest received i.e. ₹ 45,90,876/-? The Hon'ble President has referred the matter under section 255(4) to me for decision as Third Member. 2. Ground No.4 in the appeal - it is an appeal by the department - is as under:- 4. On the facts and in the circumstances of the case, the CIT(A) has erred in directing the AO to tax the net interest received from the I.T. Department relying on the decision of Delhi Tribunal in the case of R N Aggarwal vs. ITO and that of Bombay Tribunal in the case of Cynamide (India) Ltd; when in fact, the AO has rightly taxed the interest received by assessee of ₹ 45,90,876/- thereby rejecting the assessee's claim on the ground that the interest charged on late payment of tax by department is not a business expenditure. In respect of the aforesaid ground the learned Accountant Member who wrote the leading order understood the claim of the assessee to be that both the interest received and the interest paid should be set off against each other and only the net interest, if any, should be charged ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... section 36(1)(iii) in computing the business income nor was there any provision in section 57(iii) to allow such deduction in computing the income under the residuary head. The interest, according to the Gauhati Bench of the Tribunal, was not also allowable as a deduction under section 37 in computing the business income. 4. Thus, considering the judgments of the Supreme Court and the High Courts (supra) and the order of the Gauhati Bench of the Tribunal (supra), the learned Judicial Member held that the interest paid on the delayed payment of income tax was not allowable as a deduction as business expenditure or otherwise under the Income Tax Act, since such payment of interest is inextricably connected with the assessee's tax liability which itself is not allowable as a deduction. In this view of the matter he allowed the department's Ground No.4, differing with the learned Accountant Member. 5. The reference was argued at great length by both the sides. The principal contentions of the learned CIT DR are as under:- (a) The principle of netting the interest paid and received cannot be accepted. (b) The receipt of interest is taxable but the payment of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tially the same account, namely, the payment and return of taxes, the fact that the interest is paid or received under different provisions of the Act should make no difference to the question of what is to be taxed. He contended that the judgment of the Supreme Court in the case of Dr. V.P. Gopinathan (supra) is not against the assesses's claim as the facts and the controversy in that case were different. He pointed out that in the present case the interest receipt and the payment are of the same type and therefore nettable. As regards the order of the Gauhati Bench of the Tribunal relied on by the learned Judicial Member, the learned counsel for the assessee submitted that it is a case where the interest paid and received were on different accounts unlike the present case. He also pointed out that the order of the Gauhati Bench was not put to the assessee for rebuttal by the Bench. The learned counsel also draw my attention to the fact that the question framed by the learned Judicial Member actually does not arise out of the proceedings nor is the ground of appeal filed by the department clear, nor is the decision of the CIT(A) on the point. 7. Mr Mistri also took me throu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ently the assessee is statutorily bound to pay advance tax, that too voluntarily. 9. I have carefully considered the matter. At page 15 of the assessment order, the Assessing Officer has observed that the assessee was crediting only the net interest received from the income tax department and accordingly he has added back the amount of ₹ 1,37,225/- which represented interest paid by the assessee and adjusted against the interest received. In Ground No.7 before the CIT(A), the assessee pointed out that it received interest of ₹ 45,90,876/- from the income tax department and paid to the said department interest of ₹ 1,37,225/- and that the claim was based on the orders of the Delhi Bench of the Tribunal in the case of R N Aggarwal vs. ITO (supra) and the Bombay Bench of the Tribunal in the case of Cynamide (India) Ltd. (supra); according to which only the net amount of interest received from the department was taxable. The CIT(A) dealt with the issue in paragraph 9 of his order. He has accepted the assessee's submission in view of the orders of the Tribunal cited by the assessee. In Ground No.4 taken before the Tribunal the department has challenged the findi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that judgment that interest levied for failure to pay advance tax up to the statutory percentage and interest levied for delay in filing the return of income were not deductible under section 37(1) of the Act. In fact, the Bombay High Court in the case of Aruna Mills Limited (supra) has taken a similar view and the Supreme Court has referred to the judgment of the Bombay High Court in arriving at its decision. 12. Thus the question as to whether the interest paid to the income tax department under the provisions of the Income Tax Act can be deducted while computing the business income of the assesses has to be decided against the assesses. 13. The next question which arises is whether on general principles and on the principle of real income the interest received from and paid to the income tax department can be adjusted or netted against each other. On this question there are two judgments, one of the Supreme Court in CIT vs. Dr. V.P. Gopinathan (supra) and the other of the Bombay High Court in the case of Aruna Mills Limited vs. CIT (supra), both of which are against the assessee. In the case of Dr V P Gopinathan (supra), the assessee placed monies in a fixed deposit with ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... me Court would have been different. I am unable to accept the submission because in the paragraph quoted above the Supreme Court has observed that even if that were to be the case, the assessee's real income would not have diminished to the extent of the interest paid to the bank from which he took a loan. The judgment of the Supreme Court, rejecting the argument based on the theory of real income, applies equally to the computation of business income and in this view of the matter I must decide that the rule of netting does not apply to the case before me and that the assesses is properly assessable on the gross interest of ₹ 45,90,876/- and not merely on the net interest of ₹ 44,53,655/-. 14. I must also refer to the judgment of the Hon'ble Bombay High Court in the case of Aruna Mills Limited (supra), where this very argument has not found favour. One of the arguments advanced on behalf of Aruna Mills Limited before the High Court was that the Court must look at the payment of interest by the assesses company and the receipt of interest by the assessee company as a single indivisible transaction and when it is so looked, the transaction should be held to ha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re of penalty because it was for a default and also because a higher rate of interest was charged from the assessee compared to the rate of interest which the Government paid to the assessee on the advance payment of tax. On this basis also the rule of netting was not accepted by the Hon'ble Bombay High Court. It needs to be mentioned that in the case of Aruna Milts Limited (supra) the assessee had, as in the case before me, shown the net interest as business income and though the Assessing Officer did not accept the claim of the assessee for netting, he did not dispute the assessee's claim that the interest should be dealt with under the head Business . In the case before me also the Assessing Officer has taken an identical stand. 15. I am therefore of the considered opinion that on the question of netting or adjustment of the interest received and interest paid and on the question of real income, the judgment of the Supreme Court in the case of Dr V P Gopinathan (supra) and that of the Bombay High Court in the case of Aruna Mills Limited (supra) are against the assessee. 16. In view of the above legal position, I am unable to give effect to the order of the Delhi B ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mstances of the case, the CIT(A) has erred in directing the AO to tax the net interest received from the I.T. Department relying on the decision of Delhi Tribunal in the case of R.N. Agarwal v. ITO and that of Bombay Tribunal in the case of Cynamide (India) Ltd., when in fact the AO has rightly taxed the interest received by assessee of ₹ 45,90,876/- thereby rejecting the assessee's claim on the ground that the interest charged on late payment of tax by department is not a business expenditure. There was a difference of opinion between the Members constituting the then Division Bench and, accordingly the point of difference was referred by the Hon'ble President to the Third Member, to be decided according to the opinion of the majority of the Members:- 3. In relation to Ground No. 4 in the Revenue's appeal as aforesaid, the Hon'ble President constituting the Third Member, vide his order dated 02.06.2011 has passed an order. As per the Third Member, the assessee is assessable in respect of the gross interest of ₹ 45,90,876/- received from the Income-tax Department and not merely on the net interest of ₹ 44,53,655/- remaining after the set o ..... 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