Devi Cine Projector Manufacturing Co., vs Commissioner of Income Tax

M.N. Venkatachaliah, J.—These four petitions for grant of special leave arise out of the orders of the High Court of Judicature at Madras in the corresponding four Tax Case Petitions rejecting the assessee's applications u/s 256(2) of the income tax Act, 1961 and the reference of a question of law whether the disallowance u/s 40(b) of the Income Tax Act, 1961 (Act) of the interest paid by the firm to its partner should be the gross amount of such interest or should be confined to the net-amount after setting-off the interest in turn, paid by the partner to the firm on his borrowings from the firm.

In each of these cases the Income Tax Appellate Tribunal had, in substance, held that what was disallowable was the entirety of the interest paid by the firm to the partner without reference to any interest that may, in turn, have been paid by the partner to the firm. The Tribunal in the appeals preferred by the Revenue before it, allowed the appeals and reversed the view to the contrary taken in favour of the assessees by the first-appellate authority. The Tribunal also declined to state a case and refer a question of law u/s 256(1) of the Act to the High Court; whereupon the assessees moved the aforesaid Tax Case Petitions before the High Court u/s 256(2). The High Court rejected these applications on the view that there was no referable question of law arising out of the appellate orders of the Tribunal, having regard to the earlier pronouncement of the High Court in Commissioner of Income Tax Vs. O.M.S.S. Sankaralinga Nadar and Co., on which the Tribunal had relied.

The correctness of the decision of the High Court in the said sankaralinga Nadar's case has come to be examined by this Court in Kewal Krishan and others Vs. Dina Nath, this Court has taken a view in the light of which Sankaralinga Nadar & Co. 's case cannot be held to have laid down the law correctly in all respects. The pronouncement of this Court in the said Keshavji Ravji & Co's case (supra) covers the point raised in these Special Leave Petitions.

However, as the present special leave petitions arise out of the orders of the High Court rejecting the Tax Case Petitions u/s 256(2) of the Act, we should, in the normal course, grant special leave, register the corresponding civil-appeals and after setting-aside the orders of the High Court remit the corresponding Tax Case Petitions to the High Court with a direction to allow petitions and to direct the Income Tax Appellate Tribunal to state a case and refer a question of law for the opinion of the High Court and thereafter, to dispose-of the references in the light of the pronouncement of this Court in the said Keshavji Ravji & Co.'s case. This procedure would, indeed, be an idle, time-consuming and wholly avoidable formality in the circumstances of the present cases. As the position is now settled, we are of the opinion that interests of justice would be served by treating the present Special Leave Petitions as directed against and arising from the main Appellate Orders of the Income Tax Appellate Tribunal, Madras, and after granting Special Leave, set-aside that part of the appellate orders as pertain to the extent of disallowance of the interest u/s 40(b) of the Act and direct the Tribunal to dispose of the appeals on the point afresh in the light of the aforesaid pronouncement of this Court.

These petitions are, therefore, treated as directed against the main Appellate Judgments dated 9.3.1984 in ITA 1521/Mds/1982; 29.2.84 in ITA No. 898/Mds/1982; 30.8.1983 in ITA 1520/Mds/82 and 22.2.1984 in ITA 1848/Mds/83 to the Income Tax Appellate Tribunal, Madras and Special Leave granted.

The orders of the Tribunal made u/s 256(1) of the Act in each of these cases as well as the orders of the High Court in Tax Case Petition 739 of 1985, 313 of 1985, 260 of 1984 and 42 of 1986 are set-aside.

Further, the appellate orders of the income tax Appellate Tribunal, in so far as they pertain to the extent of disallowance of interest u/s 40(b) of the Act, are set aside and the said appeals remitted to the Tribunal for a fresh disposal of the appeals on the point in the light of the pronouncement in Keshavji Ravji & Co.'s case.

There will, however, be no order as to costs.