- (1.) The High Court of Kerala was called upon to consider at the behest of the Revenue the following two questions : "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." It answered the questions in favour of the assessee. The Revenue is in appeal by special leave.
(2.) To take the facts of one of the two appeals before us as illustrative, the assessee had put moneys into fixed deposit with a bank and had earned in the assessment year in question interest in the sum of Rs. 1,17,444/- thereon. On the security of the amount so deposited, the assessee took a loan from the bank and paid in respect of the loan interest to the bank in the sum of Rs. 90,410/-. The assessee claimed that he could be taxed only on the differential amount of Rs. 27,034/-. His contention was rejected by the Income-tax Officer and in first appeal. The Tribunal took the contrary view, and out of its judgment the questions quoted above were referred to the High Court. The High Court answered the questions as indicated above on the basis that the situation was one of the mutuality.
(3.) Learned counsel appearing for the assessee before the Tribunal had made it clear that the assessee's case did not rest upon the provisions of S. 57(iii) of the Act. In other words, it was not the contention of the assessee, very rightly, that he was paying interest to the bank to facilitate the earning of interest from the bank.;