JUDGMENT
A. K. MATHUR, C.J. :
This is an IT Reference under s. 256(1) of the IT Act, 1961, (for short, the Act), and the following questions of law have been referred by the Tribunal for answer by this Court :
“1. Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law to hold that the AO/Department, had accepted the position that the income from FDR was assessable under the head business on accrual basis ?
2. Whether, on the facts and in the circumstances of the case, the Tribunal was right in law to hold that the findings of CIT(A) that interest on FDRs was assessable under the head other sources is not correct ?
3. Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the interest income amounting to Rs. 71,013.00 taxed on accrual basis and subsequently claimed as deduction is admissible under law ?”
2. The assessee is a registered firm which derives its income from manufacture and sale of bidis. The assessee earned interest from bank deposits in the shape of FDRs which was not part of assessees business. During the year under consideration, the assessee claimed deduction of Rs. 71,013.00 on account of the fact that in the earlier year, the assessee had purchased FDRs out of its capital. It was assessed as interest on these FDRs on accrual basis from year to year. The FDRs were got encashed prematurely and as such, interest already taxed on accrual basis, amounted to loss. Therefore, it was claimed as a deduction. The AO also disallowed the claim stating that there was no provision in the Act to allow such deduction. Aggrieved by this order, the assessee approached the CIT who upheld the order of the AO holding that the interest income from FDRs even on accrual basis is assessable as income from other sources and as such, claim of deduction was not allowable either under s. 57 of 58 of the Act. Aggrieved by this order, the assessee approached the Tribunal which decided the matter in favour of the assessee and granted deduction of the aforesaid sum. Hence the Department approached the Tribunal for referring the matter before this Court and accordingly the Tribunal has referred the aforesaid three questions for answer by this Court.
3. We have heard learned counsel for the parties and perused the record. On the basis of the admitted facts, the question for consideration is whether loss of the income caused to the assessee on account of premature encashment of the FDRs can be made good under the provisions of the Act or not.
4. Though no provision of law was referred by the Tribunal, nor was it brought to the notice of the Tribunal, Shri Nema, learned counsel for the assessee has invited our attention to ss. 70, 71, 72 onwards. Sec. 70 deals with the set off of loss from one source against income from another source under the same head of income. Sec. 71 deals with set off of loss from one head against income from another. Sec. 72 deals with the carry forward and set off of business losses. The Tribunal of course did not make a specific reference of the provisions of law. However, the Tribunal observed in the order that in this case interest was not received in the year the assessee was assessed on its accrual basis. Therefore, it was found that once the Department accepted the position that income from FDRs was assessable under the head business on accrual basis, then the loss suffered by the assessee on account of premature encashment of FDRs will have to be allowed as a deduction, but it is not pointed out under which law.
5. The finding of the Tribunal that it is a business income is also not correct. In fact the assessee is doing the business of manufacture of bidis and not dealing with the business of investment and loans. Therefore, it can, at best, be treated to be an income from other source. Be that as it may, that would not make much difference. However, s. 71 provides that such kind of losses can be set off if the income under the same head is not assessable from income of another head. Sec. 71 reads as under :
“71. Set off of loss from one head against income from another – (1) Where in respect of any assessment year, the net result of the computation under any head of income, other than Capital gains, is a loss and the assessee has no income under the head Capital gains, he shall, subject to the provisions of this Chapter, be entitled to have the amount of such loss set off against his income, if any, assessable for that assessment year under any other head.
(2) Where in respect of any assessment year, the net result of the computation under any head of income, other than Capital gains, is a loss and the assessee has income assessable under the head “Capital gains”, such loss may, subject to the provisions of this Chapter, be set off against his income, if any, assessable for that assessment year under any head of income including the head Capital gains (whether relating to short-term capital assets or any other capital assets).
(3) Where in respect of any assessment year, the net result of the computation under the head Capital gains is a loss and the assessee has income assessable under any other head of income, the assessee shall not be entitled to have such loss set off against income under the other head.
(4) Notwithstanding anything contained in sub-s. (1) and (2) where in respect of any assessment year the net result of the computation in relation to any property (other than the property referred to in sub-cl. (i) of cl. (a) of sub-s. (2) of s. 23) under the head Income from house property is a loss and the assessee has income assessable under any other head of income, the assessee shall not be entitled to have such loss set off against income under the other head.”
Therefore, in the present case, the deduction of Rs. 71,013 allowed by the Tribunal is well justified as the assessee has suffered loss on account of premature encashment of the FDRs and such set off is permissible under s. 71 of the Act.
6. Accordingly we are of the opinion that the Tribunal was justified in allowing the relief of Rs. 71,013.00 to the assessee. We accordingly answer all the three questions in favour of the assessee and against the Revenue.