DEVI CINE PROJECTOR MANUFACTURING CO., ETC. ETC. v. COMMISSIONER OF INCOME TAX FEBRUARY 5, 1990 [M.N. VENKATACHALIAH, N.D. OJHA AND J.S. VERMA, JJ.] Income Tax Act, 1961: Section 40(b)-Disallowance of interest- Firm paying interest to partner-Partner also paying interest to firm on c
borrowing from firm-Whether such interest to be confined only to net amount after setting off interest paid by partner. Constitution of Lndia, 1950: Article lJ(r-Special Leave Petitions filed against High Court's rejection of assessee's applications under Sec- lion 256(2) of the Income Tax Act, 1961-/n view of settled position on point of law involved and to avoid time consuming procedure, Special Leave Petitions treated as arising out of appellate orders of Tribunal and matter remitted to Tribunal for disposal afresh in the light of pro- nouncement of Court.
The Income Tax Appellate Tribunal in appeals preferred before it by the revenue held that the entirety of interest paid by a firm to its partner was cmatlowable under Section 40(b) of the Income Tax Act without reference to the interest that might, in turn, have been paid by the partner to the firm on his borrowings. On appellants-assessees' application under Section 256( I) of the Act, the Tribunal declin.ed 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- lions 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 deci· sion in C./. T. v. O.M.S.S. Sankaralinga Nadar & Co., 147 !TR 332, on which the Tribunal had relied. The appellants-assessees filed special 'G
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 fH
Keshavji Ravji & Co. v. C./. T., [1990] l S.C.R. 243 that where two or DEVI CINEMA v. C.l.T. [VENKATACHALIAH, J.] more transactions on which interest is paid to or received from the A partner by the firm are shown to have the element of mutuality and are referable to the funds of the partnership 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]
K~shavji Ravji & Co., [1990] 1 S.c.R. 243, followed. C.l. T. v. O.M.S.S. Sankara/inga Nadar & Co., 147 ITR 332, over-r\l\ed. In the instant case, the ap.pfa. ls. were dir~cted against the High Court's orders rejecting the assesse~'s (lpplications um\er. Section Ii.
<;'. 256(2) of the Act. However, remitting the cases to the High Court in the normal course for necessary action wo11ld be an idle, time-consum\ng and avoidable formality. Further, as the position is settled on the point raised, interests of justice would be served by treating the 3ppeals ~s directed against the lllain appellate orders of the Tribunal and remit-. g ting the cases to the Tribunal for disposal. [270B; 271A-B] Accordingly, the orders of the Tribunal and of the High Court are set aside, and the appeals remitted to the Tribunal 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.2'13. [27IE-Fl
CIVIL APPELLATE JURISDICTION: Civil Appeal Nos. 1185 to l 188 (NT) of 1990. From the Judgments and Orders dated 7.H.198?, 12.8.85, 6.~,85 f. ~ and 24.7.86 of Madras tJigh Court in T.c.P. Nos, 739/85, 313/85, 260/84 and 42/86.
T.A. Ramachandran and Mrs. Janaki Ramachandran for (he Appellants. S.C. lylanchanda, B.B. Ahuja and Ms. A. Subhashini for the Respondent. The Judgment of the Court was delivered by
VENKA T ACHALIAH, J. These four petitions for 11rant of H 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 Section 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 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 C.J. T. v. O.M.S.S. Sankaralinga Nadar & Co., 147 !TR 332 on which the Tribunal had relied.
3. The.correctness of the decision of the High Court in the said ~u11karalinga 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 Rmji & Co's case (supra) covers the point raised in these Special Leave Petitions.
-I. However, as the present special leave petitions arise out of the orders of the High Court rejecting the Tax Case Petitions under ~ection 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 DEVI CINEMA v. C.I.T. [VENKATACHALIAH, J.J
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 under Section 40(b) of the Act and direct the Tribunal to dispose of the appeals on the puint 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 'vf 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, 313 of 1985, 260 of 1984 and 42 of 1986 are set-aside.
c ,D Further, the appellate orders of the Income-tax Appellate Tri- bunal, 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 allowed.