V. V. KAMAT, J. :
These two references are brought before us by the Revenue with regard to the same assessee Dr. V. P. Gopinathan, but for different assessment years and they are 1981-82 and 1982-83 respectively. The question for answer are also indentical and they are as follows :
'1. Whether, on the facts and in the circumstances of the case, the assessee is to be assessed on the gross amount of interest received by him on his fixed deposit or on the interest received as reduced by the amount of interest paid on the loan taken on the security of such deposit ?
2. Whether, on the facts and in the circumstances of the case, the Tribunal is right in law and fact in holding :
(i) the act of making deposit and the act of borrowing on such deposit cannot be viewed as representing two different transactions;
(ii) there is thus a nexus between the deposit and the borrowing;
(iii) the principle of mutual dealings could be inferred.'
2. As per the statement of case, the only point of dispute is whether the assessee is to be assessed on the gross amount of interest received by him on his fixed deposits or on the net amount of interest which is to be considered as income taxable on that count of interest. To be more specific, as the statement of case proceeds, the assessee received as interest on his fixed deposits with the bank a certain sum and had paid interest on loans taken by him on the security of the same fixed deposit and, therefore, contended that the real income from this source of interest would be the difference in regard thereto.
3. Factually in IT Ref. No. 39 of 1992 the amount of interest on fixed deposit with the bank was Rs. 1,17,444 and at the other end payment of interest on loan taken on security of the fixed deposits was Rs. 90,410. The contention of the assessee was that the amount of interest which would become taxable would be the difference - Rs. 27,034.
4. In the other reference the assessee had a term-deposit with the State Bank of India and had also taken loan on the security of the very fixed deposit. Interest from fixed deposit was Rs. 1,71,633 and in a similar manner pleading set off, contended that the income taxable would be the difference.
5. The ITO took the amount received towards interest on fixed deposits as income taxable from other sources and rejected the contention that it would be the difference that would be alone taxable as income from the source of interest.
6. The first appellate authority - CIT(A) - confirmed the decision in regard to a contention urged that deduction is permissible under s. 57(iii) of the IT Act, 1961.
7. Before the Tribunal it was submitted that the assessee had deposited with the bank certain amount and on the security thereof, have constructed a house, he took certain loans crediting a charge on the deposits kept as security. It was submitted that such loans are popularly known as loan on fixed deposits. Factually, it was submitted that this was done in a situation relating to the rate of interest in regard to the deposits on the one hand and the loans on the other. It was contended that the rate of interest on fixed deposit is little higher, say 1-1/2% to 2-1/2% as compared to the rate of interest with regard to the loan. As a consequence what was contended was that the borrowing from the bank to the extent of 75 per cent of the fixed deposit lying with the bank in reality constituted one and the same transaction, because the purpose of existence both of the fixed deposit as well as the loan amount were coterminous. In other words, it was contended that there is a nexus between the act of deposit and taking of a loan and for accounting purposes the bank with regard to these transactions although might keep different accounts, in substance they are two sides of the same transaction which is otherwise known as parts of the same transaction. It was submitted that it can be looked upon as two sides of the coin. The Tribunal has preferred to describe the transactions in the nature of differently sounding musical tunes of the same instrument and in the exact description they are the tunes of an instrument tweedle sounding as tweedledum and tweedledee.
8. Proceeding further it was argued that with regard to the assessment year in question what is required to be seen is the taxable income with reference to a source and if, within the assessment year in question with regard to the source, interest as a part of the same transaction what appears is the net amount of interest which could be exigible to tax, it is only the difference that could be taken up for levy of tax with regard to the source and other sources of the income of the assessee during the assessment year in question.
9. It was also submitted before the Tribunal that, when really in substance, the same transaction comes up for consideration for the purpose of taxation having an element of two sides of the coin, it is an apt situation for application of the well-known principle of mutuality.
10. It was contended on behalf of the Revenue that when the situation appears that a certain amount of income is received that event of receipt puts on the clothes of the character of taxability, first in point of time in regard thereto and if at any time differently and independently by way of an independent transaction, there is a liability to pay interest, it has to be seen as an independent transaction in every sense of the term.
11. The Tribunal considered this question as to whether the situation is representing two musical notes (tunes) of the same musical instrument although sounding to be independent and different.
12. In the process of reasoning the Tribunal has observed by relying on the decision of the Andhra Pradesh High Court in CIT vs. Andhra Farm Chemicals Corporation : [1988]171ITR660(AP) that though for the purposes of accountancy two independent transactions may appear in the books of accounts if in reality what is manifested is only transaction representing the difference between interest received and interest paid has the relevant aspect to determine the taxable income of the assessee on the count of interest as income from other sources such an approach is justifiable. This was in connection with the assessee being a subsidiary company having some amounts lying with it and with a view to keep the said moneys idle, deposited them with the holding company, adjusted them when the assessee required some money by borrowing it from the holding company, pleading the differential amount on the basis of set off as taxable income through the source of interest as income from other sources. The Andhra Pradesh High Court considered the position in the light of the statutory provisions of s. 57(iii) of the IT Act, 1961 relating to the income chargeable under the head income from other sources. The Tribunal was also called upon to consider the decision of the Supreme Court in Keshavji Ravji & Co. vs. CIT : [1990]183ITR1(SC) in regard to the situation of being the part of the same transaction to be dealt with by application of principle of mutuality. In the process of reasoning the Tribunal held that the assessee would be entitled to set off the interest paid on his borrowings against interest on fixed deposits.
13. At the cost of repetition it needs to be emphasised that the question is only with regard to the amount referable to the head of interest with reference to the assessment years in question. It also needs further to be emphasised that the difference that is sought to be set off as per the contention of the assessee is the difference with regard to the amount of interest received on fixed deposits and the interest paid on the loans taken on security thereof, all during the assessment year in question independently and separately. It is not the situation that the amount is received in one assessment year and the liability of payment of interest on loan has travelled over to the next year in question. Both the receipts and payments are referable to the question of interest and the amount of fixed deposits are used as and by way of security for advancement of loan by the bank and there is a slender advantage of difference as stated at the outset of 1-1/2% or 2-1/2% which has created the situation for determination as to what would be the amount of interest that could be considered as taxable income with reference to the admitted and established factual matrix hereinbefore.
14. The income-tax is to be levied on taxable income although there may be two points of time attracting liability to tax, still the substance of the situation is the income that is to be determined as a taxable income on the concerned count. The substance of the situation would require a probe as to whether actually the income is the result with reference to the factual situation presented in the course of the concerned assessment year. The determinative factor is to find out as to what income could be said to have been received during the assessment year in question. The position emerging from twin points of time is also to be appreciated in the context of the peculiarities of the situation. Two decisions of the Madras High Court in Indian Overseas Bank vs. CIT : [1990]183ITR200(Mad) and Calcutta High Court in Sri Kewal Chand Bagri vs. CIT : [1990]183ITR207(Cal) had occasion to consider separate situations which could be understood to be the same transaction representing different situations in the context. In the Indian Oversea Banks case (supra) the question was of the profits recoverable on the outstanding contracts on the basis of rates of exchange at the end of the accounting period with reference to the estimation of profits in regard to which the assessee contended that the amounts were only in the nature of provisions and did not represent the true picture actually realised. In the case of Sri Kewal Chand Bagri (supra) the situation related to the charging of interest on loans in regard to which the assessee did not charge interest because of setback in the fathers business and in regard to the inability to pay interest is also in the same reason leading the ITO to hold that the interest income, whether received or not would be taxed on the basis of the principle that tax becomes leviable at the first point of receipt.
15. The situation led the two Courts to appreciate the real nature of the transaction and if the situation represents to be the same transaction making it difficult to arrive at a conclusion that the amount is received actually in the real sense of the term, the income in regard thereto could not be understood to be a taxable income.
16. The Tribunal also considered the decision of this Court in CIT vs. Kerala State Industrial Development Corpn. Ltd. : [1990]182ITR67(Ker) which emphasised that it is the income which is really accrued or arisen to the assessee that should be considered to be taxable and that aspect has to be judged really in the light of peculiarities of be situation. As stated at the outset, the decision of the Andhra Pradesh High Court in CIT vs. Andhra Farm Chemicals Co. (supra) also is on the path of seeing the substance rather than the situation in the context of point of time with reference to the dates in regard to the apparent receipt of the income.
17. In the light of this situation the learned senior standing counsel for taxes took us almost to the origin by placing reliance on Keshav Mills Ltd. vs. CIT : [1953]23ITR230(SC) for a proposition to ascertain the situation that can be said to be accrual, receipt or realisation of the income in the context. The apex Court at that time was dealing with a non-resident assessee whose accounts were maintained according to the mercantile system doing business through guaranteed brokers. The contention is that the assessee was not liable to pay Indian income-tax in regard to two sums which were debited by the assessee to the accounts of the brokers is ostensibly representing sales by the assessee to merchants in British India and crediting the amounts to the sales account. This led to the proposition that under the mercantile system of accounting when goods are supplied the prices thereof is debited to the purchaser, the rights and obligations of the vendor or purchaser inter se are not in any manner affected. The relationship still subsists and the receipt of income refers to the first occasion when the recipient gets money under his own control. It is observed that once an amount is received as income, any remittance or transmission of the amount to another place does not result in receipt within the meaning of s. 4(1)(a) at any other place. On the basis of factual matrix with reference to the acceptance of the mercantile system, it is observed that the profit and loss account at the end of the accounting year is based not with reference to the difference between what was actually received and what was actually paid from and out of the said amount of receipt. It is observed that taxation on income can only be on profits which accrued or arose to the assessee in the accounting year in question. The apex Court in turn has relied upon the decision of the Privy Council in the context. It is also observed that all that can be taxed in a given year are the profits and gains which are received or which arise or accrue in the previous year and if the Act directs that the profits are to be computed in a given case on accruals or arisals and not on actual receipts it is essential that, that be done. The decision was relied upon to emphasize the point of time in the context, however, the observations spell out many relevant aspects to be considered in the context of the situation. Learned senior standing counsel for taxes also brought to our notice in the process yet another decision of the apex Court in State Bank of Travancore vs. CIT : [1986]158ITR102(SC) again relating to the basic position with regard to the accrual of income in a mercantile system of accounting with reference to interest on sticky advances actually debited to the customers but taken to Interest Suspense Account to consider whether such a situation amounts to an accrual of income with reference to the real income theory.
18. The State Bank of Travancore was a subsidiary of the State Bank of India and had maintained its accounts on the mercantile system of accounting and used to charge interest on advances. The advance in reality become extremely doubtful of recovery and, therefore, nicknamed as sticky advances by debiting them with the concerned parties. It appears from the factual matrix that recovery of even the principle amounts had become improbable and doubtful and as such the interest thereon though debited to the respective debtors had to be shown after taking the amount to the Interest Suspense Account. This was done obviously to avoid showing inflated profits. In the context of the above factual matrix, the proposition relied upon by the learned senior standing counsel for taxes [appearing to be from the dissenting judgment of Justice V. D. Tulzapurkar : [1986]158ITR102(SC) ] that even under the mercantile system of accounting it is only accrual of real income which is chargeable to tax and accrual is a matter of substance and it is to be decided on commercial principles having regard to the business character of transactions and the realities and specialities of the situation. It cannot be determined by adopting theoretical or doctrinaire or legalistic approach. From the head note appearing at page 104 of the report with regard to the propositions in relation to the theory of real income, relied upon by the learned senior standing counsel for taxes, it would also appear that the situation has to be judged in the light of the reality of the situation with an attempt to find out as to whether the income has really accrued or arisen to the assessee that could be considered as taxable with reference to the assessment year in question. Carefully considering the decision of the apex Court, it re-emphasized the need to ascertain the real character of the situation under consideration.
19. In the context the learned senior standing counsel for taxes relied on yet another decision of the Supreme Court in Moti Lal Chhadami Lal Jain vs. CIT : [1991]190ITR1(SC) where the apex Court had an occasion to consider the mutual agreement to find out factually as to when it could be said that the income had accrued, in the process of reasoning, in the context of considering the terms and conditions of the agreement between the assessee in regard to a lease dt. 3rd May, 1996. One of the clauses of the said document of lease fixed the annual rent of Rs. 21,000 out of which Rs. 10,000 was to be paid to a college. There was a subsequent agreement also amongst the members of the family of the assessee, the company, the trust and the college recording payment in four quarterly instalments and a provision for creation of a charge in the event of failure of payment of the amount to the college. In the process the apex Court considered the expression reaches the assessee and has been received in the context of the situation. It is observed that where the obligation flows out of an antecedent and independent situation, it effectively slices away a part of the corpus of the right of the latter to receive the entire income and the provision with regard to the creation of charge in regard thereto. The apex Court observed in the context that the arrangement with regard to the payment of Rs. 10,000 was only a mode of application of the income of the family which made no difference to its liability to pay tax on the entire rent of Rs. 21,000 which had accrued to the family. In other words, the Supreme Court was considering the nature of the agreement with regard to the question of tax liability whether it would alter as a result of the subsequent agreement providing for the creation of charge in the event of failure of payment of the amount.
20. We had an occasion ourselves to consider the situation only a day before yesterday in deciding IT Ref. No. 103/91 and in regard thereto we had an occasion to consider similar aspect in detail as flowing from the decision of the Supreme Court in Challapalli Sugars Ltd. vs. CIT : [1975]98ITR167(SC) in the process of determination of what would be actual cost. The question was with reference to the amounts of interest which had to be understood as capitalised interest. We were dealing with the situation where the assessee had earned interest on deposits sought to be treated as income from other sources by the taxing authorities and a contention in regard thereto that the situation has to be considered as a nexus or relationship which would have effect by way of addition or deduction of the capital as a result of receipts and payments in regard to the amount of interest in connection.
21. We had an occasion to consider the real situation, drawing elaborately from the approach of the apex Court in the said judgment in regard to the situation. The situation is already described by us as representing two sides of a coin in a similar way as the Tribunal has described the situation as two musical tunes from one instrument - tweedledum and tweedledee. Following the decision of the apex Court in Challapalli Sugar Ltd. (supra), we have also felt the need to understand the real nature of nexus or relationship that the amount of interest and its sources in regard to the situation. In the course of reasoning we have observed that when the situation is represented as two sides of the coin, the apparent position showing the difference gets crystalised when it comes to the knowledge that it is one and the same situation approached with different angles with the same sight in regard thereto. There is no reason even after hearing the learned senior standing counsel for taxes to find fault with the said approach to find out the real substance of the situation.
22. During the course of hearing of the present reference, although the Tribunal did not think the decision of the Supreme Court in : [1990]183ITR1(SC) , we have been benefited much in the pathway of logical extension of the principles discussed by us in IT Ref. No. 103/91. We have referred to the decisions of the apex Court right from the year 1953 as above to show the trace of the pathway of the progress in the approach starting from the principle of strict legal liability circumscribed by the statutory provisions leading up to the approach of finding out the substance of the situation. We have also seen that the Courts have given importance to the basic situation that the tax liability has to be ascertained with reference to the income that could be considered as taxable in the context. Keshavji Ravjis case (supra) of the apex Court is an important step ahead in the process of emphasising the substance, if need be, of the situation to travel beyond the basic canons of interpretation. The apex Court emphasises consciousness not to exclude equitable construction where strict literal construction does not lead to the result intended.
23. This was in the context of a situation referable to two or more transactions in regard to which interest is paid to or received from as demonstrating two sides of the coin. This has been in connection with the problem of the firm in relation to its partners. It is observed that this relationship has to be understood with reference to the element of mutuality and thereby gets referable to the funds of partnership as such, not precluding the quantification of the interest on the basis of such element of mutuality. The interest paid to a partner by the firm in excess of what is received from the partner whose situation under consideration before the apex Court in Keshavji Ravjis case (supra). The apex Court was concerned with the situation of quantification of interest, though for the purpose of determination of liability under s. 40(b) of the IT Act, may be prior to the amendment of 1984. The apex Court also referred to the circular of the CBDT broadly with a view of seeing the principle of mutuality in regard thereto.
24. In the process of reasoning what has been observed would have to be understood as a step ahead in regard to the process of understanding the taxing provisions. It is observed that in identifying and quantifying interest it would be permissible to take both the payments into consideration and treat only such excess, if any, paid by the firm as susceptible to the exclusionary rule under consideration. In the process of reasoning, the apex Court yet relying on its earlier decision, has considered the approach that the words in statute must be given their ordinary meaning and grammatical construction is clear, manifest and without doubt, that construction ought to prevail unless there are some strong and obvious reasons to the contrary. In the context the reasoning proceeds further in such a way that the object of interpretation of a statute is to discover the intention of the Parliament as expressed in the Act. It is observed that taxation has ceased to be regarded as an impertinent intrusion into the sacred rights of private property and it is now increasingly regarded as a potent fiscal tool of the State policy to strike the required balance - required in the context of the felt-needs of the times - between the citizens claim to enjoyment of his property on the one hand and the need for an equitable distribution of the burdens of the community to sustain special services and purposes on the other. In the process of reasoning, real income test is sought to be applied. The rules of interpretation are not rules of law, they are mere aids to construction and constitute some broad pointers. The interpretative criteria apposite in a given situation may, by themselves, be mutually irreconcilable. It is the task of the Court to decide which one in the light of all relevant circumstances, ought to prevail. In the context, the rules of interpretation are to be regarded as useful servants but quite often tend to become difficult masters. The apex Court in this context has sought the benefit of the observation of lord Reid in Maunsell vs. Olins (1975) 1 All ER 16.
25. This idea of mutual dealings and the principle of set off is seen by the apex Court as really overloaded in favour of its application as provided by the various decisions referred to therein. The Tribunal has dealt with this decision only by observing that the apex Court was concerned only with bankruptcy proceedings in regard to which the principle of set off was statutorily recognised, although the Tribunal has referred to the observations of the apex Court at page 15 of this judgment.
26. In our judgment, the taxing authority is entitled and is indeed bound to determine the true legal relation with reference to the transaction and in the process the authority has to unravel the state of affairs to determine the true character of the relationship and the process has to be by a probe into the substance of the transaction.
27. In the light of the above situation available from the consistent decisions of the apex Court referred to hereinbefore, the decision of the Rajasthan High Court in Hemendra Singh vs. CIT in our judgment will suffer the situation of desertion. The decision related to the assessee who had taken loans by placing fixed deposits in banks and incurring expenditure wholly and exclusively for earning income from other sources. Facts also reveal that loans were taken solely for the purpose of maintaining interest income from fixed deposit, all these leading the Court to conclude that the assessee would not get any benefit under s. 57(iii) of the IT Act, 1961, factually the situation of mutuality is seen far away from the factual matrix. The Court has held that although the immediate purpose of taking loans was to construct a house, the fact that the assessee took loan on the security of his fixed deposit in banks in order to maintain his interest income would be irrelevant. It is also observed that the interest paid on the loans could not be said to be expenditure incurred wholly or exclusively for earning income from other sources.
28. In our judgment the golden thread running through all the decisions of the apex Court would require us to understand the situation on the basis of principle of mutuality. To find out whether there is any nexus or relationship which is in the nature of two sides of the same coin or musical tunes from one instrument sounding tweedledum and tweedledee.
29. We have seen the factual matrix. The contention of the assessee was that it would only be difference with regard to the interest that he received and that he had to pay to the same bank in relation to the fixed deposit on the one hand and interest on loans on the basis of security of the said fixed deposit. In our judgment the situation is none other than a situation of mutuality. For all the above reasons our answer to question No. 1 would be that the assessee is to be assessed on the interest received as reduced by the amount of interest paid on the loan taken on the security of such deposit. Our answer to question No. 2 would be in the affirmative. In other words, the answers are against the Revenue and in favour of the assessee to both the questions.