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1998 DIGILAW 85 (MAD)

Commissioner of Income Tax v. Kamadhenu

1998-01-29

A.SUBBULAKSHMY, N.V.BALASUBRAMANIAN

body1998
Judgment :- N. V. BALASUBRAMANIAN, J. In pursuance of the directions of this Court in T.C.P. Nos. 693 and 694 of 1985, dt. 25th November, 1984, the Tribunal has stated a case and referred the following questions of law for our consideration 1. Whether, on the facts and in the circumstances of the case, the Tribunal is justified in holding that for the purpose of disallowance under s. 40(b) only net interest should be taken into account and not gross interest ? 2. Whether, on the facts and in the circumstances of the case, the Tribunal is justified in holding that the sum of Rs. 9, 063 being the interest paid by the assessee-firm to Shri Shantharam could not be disallowed under s. 40(b) of the Act and the partner had obtained loan from Egmore Benefit Society for the purpose of the assessee-firm and in reality the payment was made only to Egmore Benefit Society ? 2. The assessee is a firm carrying on business in textiles. In assessment completed for the asst. yr. 1979-80, the ITO hold that for the purpose of applying the provisions of s. 40(b) of the IT Act, 1961 (hereinafter to be referred as 'the Act') only the gross interest should be taken into account and not the net interest. A sum of Rs. 11, 859 was the interest payment made by the assessee. The sum of Rs. 11, 859 is made up of interest allowed to a partner amounted to Rs. 2, 296 in his capital account and a sum of Rs. 9, 063 being the interest on loan obtained by the partner Shantaram from Egmore Benefit Society for the purpose of the assessee's business on the security of his personal property. The firm charged interest on the various amounts advanced to the partner and the amount of interest charged was Rs. 6, 989. The ITO made an addition of not only the sum of interest of Rs. 9, 063 but also the interest of Rs. 6, 989 3. The assessee appealed to the CIT(A). The CIT(A) deleted the double addition of Rs. 6, 989. The CIT(A) also held that the interest paid to the partner of the firm cannot be deducted from the interest received from the partners in computing the income of the firm. 9, 063 but also the interest of Rs. 6, 989 3. The assessee appealed to the CIT(A). The CIT(A) deleted the double addition of Rs. 6, 989. The CIT(A) also held that the interest paid to the partner of the firm cannot be deducted from the interest received from the partners in computing the income of the firm. The CIT(A) further held that the entire amount of interest paid to the partner would require to be disallowed under s. 40(b) of the Act 4. The assessee as well as the Revenue preferred appeals against the order of the CIT(A) before the Tribunal. The Tribunal held that only the net interest should be taken into account for the purpose of disallowance under the provisions of s. 40(b) of the Act. The Tribunal also gave an additional reason that the interest of Rs. 9, 063 paid by the assessee to its partner was really an amount to the Egmore Benefit Society paid through its partner, since he had obtained a loan on his individual responsibility and furnished the security of his own property. The Tribunal, therefore, recorded a finding that if the interest on the loan is to be excluded from consideration, then there would be no amount of interest disallowable under s. 40(b) of the Act. The Tribunal further held that having regard to the scope of the appeal before the Tribunal and the fact that the Tribunal cannot grant a greater relief than that was claimed by the assessee, the Tribunal was of the view that the amount disallowable should be restricted to Rs. 4, 369 as claimed by the assessee. The Tribunal also held that the appeal by the Revenue against the order of the CIT(A) deleting the double addition was misconceived. In this view of the matter the Tribunal allowed the appeal preferred by the assessee and dismissed the appeal preferred by the Revenue 5. On the basis of the directions of this Court, the Tribunal stated a case and referred the questions of law set out above. Insofar as the first question of law is concerned, Mr. C. V. Rajan, learned counsel for the Revenue, fairly submitted that the issue raised in the first question is concluded against the Department by a decision of the Supreme Court in the case of Keshavji Ravji & Co. Insofar as the first question of law is concerned, Mr. C. V. Rajan, learned counsel for the Revenue, fairly submitted that the issue raised in the first question is concluded against the Department by a decision of the Supreme Court in the case of Keshavji Ravji & Co. vs. CIT 1990 Indlaw SC 825 : 1990 Indlaw SC 825 (SC) : TC 33R.336 wherein the apex Court held that only net interest should be the subject-matter of disallowance under s. 40(b) of the IT Act, and following the decisions of the Supreme Court in Keshavji Ravji & Co. case (supra), we answer the first question of law referred to us in the affirmative and against the Revenue 6. Insofar as the second question of law is concerned, we are of the opinion that in view of the answer to the first question, it is not necessary to render any answer to the second question of law. We have already seen that the Tribunal has restricted the disallowance to be made to Rs. 4, 369 and we also noticed how the said sum of Rs. 4, 369 was arrived at by the Tribunal. Since the amount to be disallowed is restricted to Rs. 4, 369 by the Tribunal, we are of the opinion, it is not necessary for us to consider the question whether the interest paid by the firm to the partner was really the interest paid to Egmore Benefit Society. We are, therefore, of the view that the issue raised in the second question is purely academic insofar as this tax case is concerned. Therefore, we are not answering the second question of law referred to us, though that we are not confirming the order of the Tribunal on merits of the case. Accordingly, we return the second question of law without providing for an answer to it 7. Accordingly, we answer the questions of law referred to us as under First question of law : It is answered in the affirmative and against the Revenue Second question of law : In view of our answer to the first question it is returned unanswered. There will be no order as to costs, in the circumstances of the case.