Expenditure can be disallowed only in the event of non-deduction of TDS & not in cases involving short deduction

Expenditure can be disallowed only in the event of non-deduction of tax at source, and not in the cases involving short deduction, TDS not required to be deducted on exchange rate difference if TDS  already been deducted at the time of credit of amount

Sandvik Asia Ltd. Vs. JCIT (ITAT Mumbai)-  Assessee was liable to pay Swiss Kroner 38,58,000/- to M/s A B Sandvik Coromant, Sweden and in the account books for the previous year relevant to the assessment year 1991-92, the said income was credited to the account of the aforesaid foreign concern. It was a common point between the parties that when the assessee credited the income payable to the foreign concern as research and technical know-how in the earlier year, the provision so made on the basis of the exchange rate then existing was subjected to tax deduction at source in terms of section 195(1) of the Act.

Notably, section 195(1) of the Act prescribes deduction of tax at source on a sum payable to non-resident either at the time of credit of such income to the account of the payee or at the time of payment thereof, whichever is earlier. The phraseology of section 195(1) of the Act clearly brings out that deduction of tax is to be made at one instance, either at the time of credit of such income to the account of the payee or at the time of payment thereof, whichever is earlier. Quite clearly, section 195(1) does not envisage deduction of tax at both instances, i.e. at the time of credit of income to the account of the payee as well as at the time of payment thereof. In other words, it would be safe to deduce that where the assessee has deducted tax at source at the earlier point of time, namely, at the time of crediting of income into the account of the payee, the assessee thereafter is under no obligation to again deduct tax at source at the time of payment of such income. Section 195(1) of the Act also enumerates the timing at which the tax is required to be deducted by the payer in relation to a transaction which entails payment of a sum chargeable under this Act to a non-resident. In the present case, it is evident that the assessee was required to deduct tax at source on its transaction to pay research and technical know-how fee to the foreign concern and it deducted requisite tax at source as per section 195(1) of the Act at the time when such income was credited to the account of the foreign concern as per the then prevailing foreign exchange rate. Consequently, it would follow that when such income is actually paid by the assessee to the foreign concern, the same would not again invite the deduction of tax at source as per section 195(1) of the Act. Ostensibly, as per the agreement, the assessee is to make a total payment of Swiss Kroner 38,58,000/-to the foreign concern and out of which, it was required to remit Swiss Kroner 7,71 ,600/- during the year under consideration. The amount of income credited to the account of the payee concern in the earlier year corresponded to Swiss Kroner 38,58,000/-, albeit it was stated in Indian rupees at the then prevailing exchange rate. During the year, out of the above amount, Swiss Kroner 7,71 ,600/- has been remitted. The amount remitted is only a part of the total obligation of Swiss Kroner 38,58,000/- and not in addition to the aforesaid amount. In this year, on account of fluctuation in foreign exchange rate, only the cost of remitting the amount to foreign concern has increased, but there is no additional amount of Swiss Kroner that is payable to the foreign concern other than Swiss Kroner 38,58,000/- credited to the account of the foreign concern in the earlier year. Ostensibly, the transaction with the payee concern remained of Swiss Kroner 38,58,000/- and, therefore, the same having been subjected to deduction of tax at source on an earlier occasion at the time of crediting of such income to the account of the payee, it would not again call for deduction of tax at source per section 195(1) of the Act. In fact, even the ratio of the judgment of the Honourable Karnataka High Court in the case of CIT v Mac Charles (I) Ltd. 195 Taxman 296 (Kar) supports the aforesaid proposition.

INCOME TAX APPELLATE TRIBUNAL, PUNE

Sandvik Asia Ltd. Vs. Jt. Commissioner of Income-tax

ITA No. 758/PN/99 & CO No. 58/PN/05 (Asst. Year: 1994-95)

Dy. Commissioner of Income- Tax Vs. Sandvik Asia Ltd.                   

ITA No. 113/PN/98- (Asst. Year: 1994-95)

Date of Pronouncement : 29.11.2011

ORDER

PER G.S. PANNU, AM

1. Since the captioned appeals and Cross objection pertain to same assessee, they were heard together and are being disposed of by a common order for the sake of brevity.

2. We shall first take up assessee’s appeal vide ITA No 758/PN/99 pertaining to the assessment year 1994-95. This appeal by the assessee is directed against the order of the Commissioner of Income-tax (Appeals) dated 26.7.1999 which, in turn, has arisen out of the order of the Assessing Officer dated 10.3.1998 giving effect to the earlier order of the Commissioner of Income-tax (Appeals) dated 28.11.1997.

3. The pertinent facts with regard to the issue involved in Ground Nos 1 to 6 relating to dis-allowance of Rs 8,82,234/- on account of loss on foreign exchange rate fluctuation can be understood as follows. The exchange rate fluctuation is in relation to the fourth instalment of research and know how fee remitted by the assessee to its foreign collaborator. During the year under consideration, the assessee had claimed deduction of Rs 42,89,872/- as fourth instalment of research and know how fee in its return of income. Notably, the assessee had entered into a research and know how agreement with A B Sandvik Coromant, Sweden during the assessment year 1991-92 in terms of which the assessee was liable to pay Swiss Kroner 38,58,000/-. In the assessment order for the assessment year 1991 -92, the Assessing Officer held that since the duration of the Agreement was for five years, the appellant was entitled to deduction of Swiss Kroner 7,71,600/- being 1/5^th of the amount payable under the Agreement in five assessment years commencing from the assessment year 1991-92. However, at that point of time, the assessee had deducted the prescribed tax deductible at source (TDS) also and remitted the same to the exchequer, on the entire amount of fee payable to the foreign collaborator, including the future instalments as the assessee had credited the entire amount to the account of the collaborator in the account books. Accordingly, in the year under consideration, assessee claimed deduction of Rs 42,89,872/- as fourth instalment of research and know how fee in its return of income. While remitting the instalment to the foreign collaborator during the year, it suffered foreign exchange fluctuation loss of Rs 8,82,234/- which was comprised in its claim of Rs 42,85,872/-. At the time of original assessment, the Assessing Officer disallowed the loss of Rs 8,82,234/- on the ground that the additional claim of exchange loss did not pertain to the year under consideration.Therefore, he allowed deduction for research and know how fee to the extent of Rs 34,07,638/- as against the claim of Rs 42,89,872/- in the assessment proceedings dated 17.2.1997. The Commissioner of Income-tax (Appeals) in its order dated 28.11.1997 noticed that the first three instalments have been deducted on actual payment basis in the earlier years and, therefore, directed that even in this year deduction on account of exchange loss should be allowed, “if the remittances are actually made subject to appropriate deduction of tax at source as per section 40(a)(i) of the Act. The matter is restored to the Assessing Officer.”

4. Thereafter, the Assessing Officer passed an order dated 10.3.1998 giving effect to the order of the Commissioner of Income-tax (Appeals), and again denied the claim of deduction on account of loss on foreign exchange fluctuation amounting to Rs 8,82,234/-. Now, the Assessing Officer was of the view that tax has been deducted at source in the initial year only with respect to the amount of Rs 34,07,638/- corresponding to Sw.Kr 7,71,600/- (i.e. 1/5^th of the amount payable) and in so far as the additional sum incurred of Rs 8,82,234/- on account of loss on exchange rate fluctuation is concerned, no tax was deducted during the year under consideration, which was violative of section 40(a)(i) of the Act. The Commissioner of Income-tax (Appeals) vide his impugned order dated 26.7.1999 has upheld the dis allowance against which the assessee is in appeal before us.

5. Before us, the assessee has assailed the stand of the Revenue by raising the following six Grounds of Appeal, but essentially the grievance is that the Assessing Officer has wrongly disallowed Rs 8,82,234/- by invoking section 40(a)(i) of the Act:-

6. Before us, the learned Counsel for the assessee has made multi-faceted arguments assailing the dis-allowance of Rs 8,82,234/- representing loss on account of foreign exchange fluctuation in remitting the instalment of research and know-how fee to the foreign collaborator. The first and foremost argument set up by the appellant is that the assessee is not required by the provisions of section 195(1) of the Act to deduct tax at source on the impugned amount, inasmuch as the same does not form part of technical fee but merely represents expenses met out by the assessee to remit the appropriate amount of foreign exchange to the foreign collaborator. It is pointed out that when the assessee credited the Research and Technical know-how fee payable to the foreign collaborator in the earlier year, the appropriate amount of tax was deducted at source in terms of section 195(1) of the Act and during the year under consideration, the increase in the expenditure is merely on account of foreign exchange fluctuation and accordingly, it would not be necessary to deduct TDS again on the said amount and thus section 40(a)(i) is not attracted. Secondly, it is sought to be made out that even if it is accepted that the impugned amount partakes the character of research or technical know-how fee, even then the dis-allowance envisaged under section 40(a)(i) is not permissible. This assertion is based on the plea that section 40(a)(i) can be invoked only in the event of complete non-deduction of tax at source, but not in a case where the tax deducted at source is found to be short. It is pointed out that there is no dispute that in so far as the amount of Rs 34,07,738/- is concerned, tax has been deducted at source and it is only on the additional claim of Rs 8,82,234/- representing loss on foreign exchange fluctuation that the tax has not been deducted. Thus, it is a case of mere short deduction of tax at source, which as per the assessee, cannot be used to invoke the dis-allowance envisaged under section 40(a)(i) of the Act. In this context, reliance has been placed on the following two decisions of the Tribunal, wherein it has been opined that provisions of section 40(a)(ia) of the Act do not apply in the event of lesser deduction of tax at source, but are applicable only in the event of non deduction of tax at source:

(i) DC IT-1 1(2), Mumbai v. M/s Chandabhoy & Jassobhoy, Mumbai vide ITA No 20/Mum/201 0 order dated 8.7.2011; and,

(ii) DCIT Cir. 33, Kolkota v. M/s S k Tekriwal, vide ITA No 1 135/Kol/2010 dated 21.10.2011

It is contended that the parity of reasoning laid down in the aforesaid decisions is equally relevant and applicable in the context of section 40(a)(i) of the Act also, which is the subject matter of consideration in the instant case. Apart from the aforesaid submissions, the learned Counsel also pointed out that the Assessing Officer while giving effect to the order of the Commissioner of Income-tax (Appeals) dated 28.11.1997, has travelled beyond his jurisdiction by invoking the provisions of section 40(a)(i) in the context of the impugned sum of Rs 8,82,234/. In this regard, reference has been made to the directions of the Commissioner of Income-tax (Appeals) contained in his order dated 28.11.1997 to point out that the Commissioner of Income-tax (Appeals) had required the Assessing Officer to merely verify if the remittance was actually made in the year and the wordings “appropriate deduction of tax at source as per section 40(a)(i)” contained in the order of the Commissioner of Income-tax (Appeals) was only to examine whether the requisite tax has been deducted with reference to the amount of 1/5^th instalment payable, on which the necessary tax had already been deducted in the preceding year. Thus, it was submitted that the dis-allowance of Rs 8,82,234/- has been wrongly perpetuated by the Assessing Officer.

7. On the other hand, the learned Departmental Representative, appearing for the Revenue, has vehemently submitted that the Commissioner of Income-tax (Appeals) made no mistake in holding that the Assessing Officer rightly invoked the provisions of section 40(a)(i) of the Act in the present case in order to make the impugned dis-allowance. It was contended that the assessee is required to deduct tax at source not only on the amount of provision made with regard to technical know-how fee credited in the earlier years, but also on account of difference on account of foreign exchange fluctuation resulting in the year of actual remittance. According to him, the assessee was required to deduct TDS in respect of the differential amount also and, therefore, the dis-allowance was quite justified having regard to the provisions of section 40(a)(i) of the Act.

8. We have carefully considered the rival submissions. Before adjudicating on the controversy, we may observe that the dispute emanates from the assessment originally made under section 143(3) of the Act on 17.2.1997 wherein the foreign exchange fluctuation loss of Rs 8,82,234/- pertaining to the remittance of research and know-how fee to the foreign collaborator was disallowed on the ground that it pertained to the earlier year. When the matter travelled to the Commissioner of Income-tax (Appeals), vide order dated 28.11.1997, the Commissioner of Income-tax (Appeals) in para 14.3 of his order analysed the facts that additional liability on account of exchange loss for the first three instalments was allowed deduction on actual payment made in earlier years. In order to ensure consistency, the Commissioner of Income-tax (Appeals) directed the Assessing Officer to verify the actual remittances and thereafter allow deduction on account of foreign exchange loss in this year too and accordingly the issue was remanded to the file of the Assessing Officer. However, the following words, “if the remittances are actually made subject to appropriate deduction of tax at source as per section 40(a)(i) of the Act.” in his direction has led to a new arena of dispute between the assessee and the Revenue. In the order passed to give effect to the directions of the Commissioner of Income-tax (Appeals), the case made out by the Assessing Officer, and which is presently in appeal before us, is to the effect that the assessee was required to deduct tax at source even with regard to the exchange rate fluctuation loss in terms of section 195(1) of the Act and the assessee not having done so, the same is to suffer dis-allowance in terms of section 40(a)(i) of the Act. Quite clearly, the case made out by the Revenue is founded on the assumption that the exchange rate fluctuation loss also partakes the character of technical fee. Without going into this controversy, it transpires from the material on record that loss on account of foreign exchange in relation to the earlier instalments remitted to the foreign collaborator has been allowed in the case of the assessee, and it is only in this year the Revenue has made out a case for invoking section 40(a)(i) for the assessee not having deducted the requisite tax at source. The provisions of section 195(1) of the Act cast an obligation on the assessee to deduct tax at source on any sum payable to a non-resident. The relevant portion of Section 195(1) reads as under:

“195(1): Any person responsible for paying to a non-resident, not being a company, or to a foreign company, any interest or any other sum chargeable under the provisions of this Act (not being income chargeable under the head “Salaries” shall, at the time of credit of such income to the account of the payee or at the time of payment thereof in cash or by the issue of a cheque or draft or by any other mode, whichever is earlier, deduct income tax thereon at the rates in force:”

9. Shorn off other details, section 195(1) of the Act, in so far as its relevance for the present controversy is concerned, requires deduction of tax at source “at the time of credit’ or “at the time of payment’ of an income, whichever is earlier. Factually speaking, the assessee was liable to pay Swiss Kroner 38,58,000/- to M/s A B Sandvik Coromant, Sweden and in the account books for the previous year relevant to the assessment year 1991-92, the said income was credited to the account of the aforesaid foreign concern. It was a common point between the parties that when the assessee credited the income payable to the foreign concern as research and technical know-how in the earlier year, the provision so made on the basis of the exchange rate then existing was subjected to tax deduction at source in terms of section 195(1) of the Act. Notably, section 195(1) of the Act prescribes deduction of tax at source on a sum payable to non-resident either at the time of credit of such income to the account of the payee or at the time of payment thereof, whichever is earlier. The phraseology of section 195(1) of the Act clearly brings out that deduction of tax is to be made at one instance, either at the time of credit of such income to the account of the payee or at the time of payment thereof, whichever is earlier. Quite clearly, section 195(1) does not envisage deduction of tax at both instances, i.e. at the time of credit of income to the account of the payee as well as at the time of payment thereof. In other words, it would be safe to deduce that where the assessee has deducted tax at source at the earlier point of time, namely, at the time of crediting of income into the account of the payee, the assessee thereafter is under no obligation to again deduct tax at source at the time of payment of such income. Section 195(1) of the Act also enumerates the timing at which the tax is required to be deducted by the payer in relation to a transaction which entails payment of a sum chargeable under this Act to a non-resident. In the present case, it is evident that the assessee was required to deduct tax at source on its transaction to pay research and technical know-how fee to the foreign concern and it deducted requisite tax at source as per section 195(1) of the Act at the time when such income was credited to the account of the foreign concern as per the then prevailing foreign exchange rate. Consequently, it would follow that when such income is actually paid by the assessee to the foreign concern, the same would not again invite the deduction of tax at source as per section 195(1) of the Act. Ostensibly, as per the agreement, the assessee is to make a total payment of Swiss Kroner 38,58,000/-to the foreign concern and out of which, it was required to remit Swiss Kroner 7,71 ,600/- during the year under consideration. The amount of income credited to the account of the payee concern in the earlier year corresponded to Swiss Kroner 38,58,000/-, albeit it was stated in Indian rupees at the then prevailing exchange rate. During the year, out of the above amount, Swiss Kroner 7,71 ,600/- has been remitted. The amount remitted is only a part of the total obligation of Swiss Kroner 38,58,000/- and not in addition to the aforesaid amount. In this year, on account of fluctuation in foreign exchange rate, only the cost of remitting the amount to foreign concern has increased, but there is no additional amount of Swiss Kroner that is payable to the foreign concern other than Swiss Kroner 38,58,000/- credited to the account of the foreign concern in the earlier year. Ostensibly, the transaction with the payee concern remained of Swiss Kroner 38,58,000/- and, therefore, the same having been subjected to deduction of tax at source on an earlier occasion at the time of crediting of such income to the account of the payee, it would not again call for deduction of tax at source per section 195(1) of the Act. In fact, even the ratio of the judgement of the Honourable Karnataka High Court in the case of CIT v Mac Charles (I) Ltd. 195 Taxman 296 (Kar) supports the aforesaid proposition.

10. Apart therefrom, the assessee has also made an alternative plea that even if the impugned loss on account of foreign exchange rate is liable for deduction of tax at source under section 195(1) of the Act, yet the non-deduction of such sum would not invite the dis allowance of section 40(a)(i) of the Act. As per the assessee, out of the total claim of Rs 42,89,872/- as fourth instalment of research and know-how fee in this year, tax has been deducted in relation to a sum of Rs 34,07,638/- and, therefore, it is merely a case involving short deduction of tax at source and not a case for failure to deduct tax at source. In this context, we have perused the decisions of our co-ordinate Benches in the cases of M/s Chandabhoy & Jassobhoy, Mumbai (supra) and M/s S K Tekriwal (supra). In both the decisions, which have been rendered in the context of section 40(a)(ia) of the Act, it has been held that the dis-allowance envisaged in section 40(a)(ia) can be invoked only in the event of non-deduction of tax, but not in cases involving short deduction of tax at source. In our view, the ratio of the decisions is squarely applicable in the present case also, inasmuch as the provisions of section 40(a) (ia) of the Act are akin to those of section 40(a)(i) which is the subject-matter of consideration before us. On this count also, we find that invoking of section 40(a)(i) of the Act to disallow the sum of Rs 8,82,234/- is untenable.

11. Therefore, on both the counts as discussed above, the impugned sum is not dis-allowable in terms of section 40(a)(i) of the Act and accordingly, we set aside the order of the Commissioner of Income-tax (Appeals) and direct the Assessing Officer to delete the addition of Rs 8,82,234/-. Thus, on the first issue, assessee succeeds.

12. The second grievance of the assessee articulated in terms of Ground Nos. (7) & (8) relate to a dis-allowance of Rs 6,11,000/-, and read as under:-

“(7) The CIT(A) erred in setting aside the issue of deduction of Rs 6,11,000/-,

(8) The CIT(A) ought to have allowed deduction of Rs 6,11,000/- being liquidated damages in view of inter alia the facts and circumstances of the case i.e. the refusal to comply with the direction in the CIT(A)’s order dated 28.11.1997.”

13. In brief the facts are that in the original assessment order dated 17.2.1997, the Assessing Officer disallowed a sum of Rs 6,11,000/-, as according to him, it was a provision for doubtful debts and was a contingent liability. Before the Commissioner of Income-tax (Appeals), it was contended that the claim was on account of liquidated damages for late supply of goods etc., which was actually deducted by the Government authorities at the time of making payment and, therefore, was an allowable deduction. The Commissioner of Income-tax (Appeals) vide his order dated 28.11.1997 disposed of the issue in para 6.3 of his order as follows:-

“6.3 The matter is considered. It is observed that the amounts have been provided for through two journal entry nos 1857 dated 31.12.1993 and 194 dated 28.2.1994. These are claimed to be actual deductions made by the Government buyers. The liability is claimed to have crystalised in the relevant assessment year. On this score it should be an allowable deduction. It is, however, not made clear as to why the amount is debited to accounts as ‘provision for doubtful debts’. No examination appears to have been made by the AO when rejecting the claim. It appears to have been disallowed only because it is debited as ‘provision’. The AO is directed to allow the deduction subject to verification that the liability crystalised in this year.”

16. Before us, the sum and substance of the arguments put-forth on behalf of the appellant is that the Assessing Officer while passing order dated 10.3.1998 went beyond the scope of directions given by the Commissioner of Income-tax (Appeals) in his order dated 28.11.1997 and, therefore, the claim has been wrongly disallowed. The learned Counsel quite fairly submitted that the direction of the Commissioner of Income-tax (Appeals) dated 28.11.1997 contained in para 6.3 which reads as under:

“The AO is directed to allow the deduction subject to verification that the liability crystalised in this year.”

be carried out in its proper perspective so as to examine whether the liability reflected by the impugned sum has been crystalised in the instant assessment year or not.

17. On the other hand, the learned Departmental Representative has relied upon the orders of the authorities below in support of the case of the Revenue.

18. We have carefully considered the rival submissions. Looking at the conspectuous of facts as emerging from the orders of the authorities below, it appears that though the claim of the assessee is under head “provision for doubtful debts”, in actuality the claim is based on certain deductions claimed to be made by the Government buyers as liquidated damages for late supply of goods, etc. The Commissioner of Income-tax (Appeals) in his order dated 28.11.1997 has referred to two journal entries in this regard and on that basis directed the Assessing Officer to allow the claim, subject to the verification that the liability crystallised in this year or not. Ostensibly, if the aforesaid factual matrix noted by the Commissioner of Income-tax (Appeals) and which was required to be verified is justified, the claim would be allowable as such. We also find that the Assessing Officer in his order dated 10.3.1998 has not carried out the directions of the Commissioner of Income-tax (Appeals) in its proper perspective, but has merely gone by the fact that the claim has been made under “provision for doubtful debts”. In our considered opinion, it would meet the ends of justice if the matter is restored to the file of the Assessing Officer with directions to consider the true nature of the claim in the light of the observations of the Commissioner of Income-tax (Appeals) in para 6.3 of his order dated 28.11.1997 and not be guided by merely the nomenclature of the head under which the claim has been made. Needless to say, in carrying out the aforesaid exercise, the Assessing Officer shall provide reasonable opportunity of being heard to the assessee. Thus, on this issue assessee succeeds for statistical purposes.

19. In the result, appeal of the assessee is partly allowed.

20. The appeal by the Revenue vide ITA No 11 3/PN/98 is directed against the order of the Commissioner of Income-tax (Appeals) dated 28.11.1997 pertaining to the assessment year 1994-95 and the Cross objection in CO No 58/PN/2005 by the assessee also emanates from the same order of the Commissioner of Income-tax (Appeals).

21. In the appeal of the Revenue, following two Grounds have been raised:

“(1) On the facts and in the circumstances of the case, the ld CIT(A) erred in deleting the addition of Rs 1,99,43,610/- made by the AO on account of excise duty payment on finished goods which is not included in the value of closing stock.

(2) On the facts and in the circumstances of the case, the ld CIT(A) erred in taxing the net of interest and thus giving relief for interest paid by the assessee to the I. T department.”

22. The first Ground relates to an addition of Rs 1,99,43,61 0/- made by the Assessing Officer on account of valuation of closing stock of finished goods due to Excise Duty payable. The Commissioner of Income-tax (Appeals) has deleted the addition by observing that similar issue was considered in assessee’s own case for the assessment years 1992-93 and 1993-94 in favour of the assessee.

23. Before us, it was a common ground between the parties that for the assessment year 1992-93, similar issue has been adjudicated by the Tribunal vide its order in ITA No 119/PN/96 dated 13.9.2011 in favour of the assessee. In view of the precedent, copy of which has been placed on record, the decision of the Commissioner of Income-tax (Appeals) deleting the addition of Rs 1,99,43,610/- on account of Excise Duty payable on finished goods not included in the valuation of closing stock is hereby affirmed. Thus, Revenue fails on this Ground.

24. The facts in relating to second Ground are that during the year, the assessee received interest of Rs 25,63,992/- from the Income-tax Department and also paid interest of Rs 10 lakhs to the Department. The claim of the assessee was that only the net interest should be charged to tax. This plea was rejected by the Assessing Officer whereas the Commissioner of Income-tax (Appeals) allowed the plea of the assessee in view of the decision of the Delhi Bench of the Tribunal in the case of R N Agarwal v. ITO. Against such a decision, Revenue is presently in appeal before us.

25. Before us, it was a common point between the parties that similar issue arose in assessee’s own case for the assessment year 1992-93 in ITA No 11 9/PN/96 (supra) wherein the issue has been decided against the assessee and in favour of the Revenue, by way of a majority decision vide order dated 13.9.2011 (supra). It has been held that the assessee is asses-sable in respect of the gross interest received from the Income-tax Department and not merely on the net interest remaining after set off of interest paid to the Department. The interest payment has also not been held to be deductible from interest received in order to arrive at the asses-sable income. In this view of the matter, the impugned order of the Commissioner of Income-tax (Appeals) on this issue is set aside and that of the Assessing Officer is restored. Thus, on this Ground Revenue succeeds.

26. In the result, appeal of the Revenue is partly allowed.

27. In so far as the issue raised by the assessee in the Cross objection is concerned, the same is as under:

“1) On the facts and circumstance of the case, the ld CIT(A) erred in directing that an amount of Rs 8,82,234/- was to be allowed subject to the provisions of s. 40(a)(i) of the Act.”