DEVI CINE PROJECTOR MANUFACTURING CO., ETC. ETC.versusCOMMISSIONER OF INCOME TAX

A              DEVI CINE PROJECTOR MANUFACTURING
                           CO., ETC. ETC.
                                 v.                                                 .)..
                  COMMISSIONER OF INCOME TAX

                              FEBRUARY 5, 1990
13
              [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
     borrowing from firm-Whether such interest to be confined only to net
c    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
D    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
E    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           I
     and refer a question of law for the opinion of the High Court. The



                                                                                    ~
F    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

                                        268
                 DEVI CINEMA v. C.l.T. [VENKATACHALIAH, J.]              269

     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]
                                                                                Ii.
          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 <;'.
     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.
                                                                                G,
         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
    270                   SUPREME COURT REPORTS             [1990] 1 S.C.R.

    special leave arise out of the orders of the High Court of Judicature at
A
    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
B   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
D   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
E   !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
F   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
G   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
H   question of law for the opinion of the High Court and thereafter, to
               DEVI CINEMA v. C.I.T. [VENKATACHALIAH, J.J               271

   dispose-of the references in the light of the pronouncement of this          A
   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
                                                                                8
   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.
                                                                               c
         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.
                                                                               ,D
         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.

         Further, the appellate orders of the Income-tax Appellate Tri- E
   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.                      F

~ N.P.V.                                                    Appeals allowed.