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PETITIONER: DEVI CINE PROJECTOR MANUFACTURINGCO., ETC. ETC.

       Vs.

RESPONDENT: COMMISSIONER OF INCOME TAX

DATE OF JUDGMENT05/02/1990

BENCH: VENKATACHALLIAH, M.N. (J) BENCH: VENKATACHALLIAH, M.N. (J) OJHA, N.D. (J) VERMA, JAGDISH SARAN (J)

CITATION:  1991 AIR 1892            1990 SCR  (1) 268  1990 SCC  (2) 551        JT 1990 (1)   250  1990 SCALE  (1)217

ACT:     Income  Tax  Act, 1961: Section  40(b)--Disallowance  of interest---Firm  paying  interest to  partner--Partner  also paying interest to firm on borrowing from firm--Whether such interest to be confined only to net amount after setting off interest paid by partner.     Constitution of India, 1950: Article 136---Special Leave Petitions filed against High Coun’s rejection of  assessee’s applications  under  Section 256(2) of the Income  Tax  Act, 1961--1n  view of settled position on point of law  involved and  to avoid time consuming procedure, Special Leave  Peti- tions treated as arising out of appellate orders of Tribunal and  matter remitted to Tribunal for disposal afresh in  the light of pronouncement of Court.

HEADNOTE: The  Income  Tax  Appellate TribUnal  in  appeals  preferred before  it  the revenue held that the entirety  of  interest paid by a firm to its partner was disallowable under Section 40(b) of the Income Tax Act without reference to tile inter- est  that might, in turn, have been paid by the  partner  to the firm on his borrowings. On appellants-assessees’  appli- cation  under  Section 256(1) of the Act, the  Tribunal  de- clined  to state a case and refer a question of law for  the opinion  of  the High Court. The  appellants-assessees  then moved  Tax  case petitions under Section 256(2) of  the  Act before the High Court. The High Court rejected the  applica- tions  on the view that there was no referable  question  of law  arising  out  of the appellate order  of  the  Tribunal having regard to its earlier decision in C.I.T. v.  O.M.S.S. Sankaralinga Nadar & Co., 147 ITR 332, on which the Tribunal had  relied.  The appellants-assessees filed  special  leave petitions in this Court.     Treating the special leave petitions as directed against the  main appellate order of the Tribunal, and allowing  the appeals, this Court,     HELD:  It  is now settled by the pronouncement  of  this Court in Keshavji Ravji & Co. v. C.I.T., [1990] 1 S.C.R. 243 that where two or 269

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more  transactions on which interest is paid to or  received from  the partner by the firm are shown to have the  element of mutuality and are referable to the funds of the  partner- ship as such, Section 40(b) should not be so construed as to exclude  in  quantifying  the interest, if any,  paid  to  a partner by the firm in excess of what was received from  the partner. [270F] Keshavji Ravji & Co., [1990] 1 S.C.R. 243, followed.     C.I.T.  v.  O.M.S.S. Sankaralinga Nadar & Co.,  147  ITR 332, over-ruled.     In  the instant case, the appeals were directed  against the  High Court’s orders rejecting the  assessee’s  applica- tions  under Section 256(2) of the Act.  However,  remitting the cases to the High Court In the normal course for  neces- sary  action would be an idle, time-consuming and  avoidable formality. Further, as the position is settled on the  point raised, interests of justice would be served by treating the appeals as directed against the main appellate orders of the Tribunal and remitting the cases to the Tribunal for dispos- al. [270B; 271A-B]     Accordingly, the orders of the Tribunal and of the  High Court are set aside, and the appeals remitted to the  Tribu- nal  for  disposal afresh on the extent of  disallowance  of interest  under  Section 40(b) of the Act in  the  light  of pronouncement  of  this  Court in Keshavji Ravji  &  Co.  v. C.I.T., [1990] 1 S.C.R.243. [271E-F]

JUDGMENT:     CIVIL APPELLATE JURISDICTION: Civil Appeal Nos. 11;55 to 1188 (NT) of 1990.     From the Judgments and Orders dated 7.11.1985,  12.8.85, 6.2.85  and  24.7.86  of Madras High Court  in  T.C.P.  Nos, 739/85, 3 13/85, 260/84 and 42/86.     T.A.  Ramachandran and Mrs. Janaki Ramachandran for  the Appellants.     S.C. Manchanda, B.B. Ahuja and Ms. A. Subhashini for the Respondent. The Judgment of the Court was delivered by VENKATACHALIAH, J. These four petitions for grant of 270 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 under  Sec- tion 256(2) of the Income-tax Act, 1961 and the reference of a  question  of law whether the disallowance  under  Section 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.     2.  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 under Section 256(1) of the Act to the  High Court; whereupon the assessees moved the aforesaid Tax  Case Petitions  before the High Court under Section  256(2).  The High  Court  rejected these applications on  the  view  that

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there  was no referable question of law arising out  of  the appellate  orders  or’ the Tribunal, having  regard  to  the earlier  pronouncement  of  the  High  Court  in  C.I.T.  v. O.M.S.S.  Sankaralinga  Nadar & Co., ITR 332  on  which  the Tribunal had relied.     3. 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 Keshavji Ravji & Co. v. C.I.T.,  [1990]  1 S.C.R. 243 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.     4. However, as the present special leave petitions arise out  of the orders of the High Court rejecting the Tax  Case Petitions under Section 256(2) of the Act, we should, in the normal course, grant special leave, register the correspond- ing 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 20 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 270 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  treat- ing 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  per- tain  to  the extent of disallowance of the  interest  under Section 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.     5.  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  ’of  the Income  Tax  Appellate Tribunal, Madras  and  Special  Leave granted.     The orders of the Tribunal made under Section 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, 3 13 of  1985, 260 of 1984 and 42 of 1986 are set-aside.     Further,  the appellate orders of the Income-tax  Appel- late  Tribunal, in so far as they pertain to the  extent  of disallowance of interest under Section 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. 6. There will, however, be no order as to costs. N.P.V.                                         Appeals   al- lowed.       272