Case: Devi Cine Projector Manufacturing Company Vs. Commissioner of Income Tax (And Others Appeals)

VENKATACHALIAH J. 1. 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 applications under section 256(2) of the Income-tax Act, 1961, and the reference of question of law whether the disallowance under section 40(b) of the Income-tax Act, 1961 ("the Act") of the interest paid by a 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 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 Madras High Court in CIT v. 0. M. S. S. Sankaralinga Nadar and Co. [1984] 147 ITR 332, on which the Tribunal had relied. 2. The correctness of the decision of the Madras High Court in the said Sankaralinga Nadars case [1984] 147 ITR 332 has come to be examined by this court in Keshavji Ravji and Co. v. CIT (Special Leave Petition No. 14291 of 1985 and connected cases) and by the judgment dated February 5, 1990, [1990] 183 ITR 1 , this court has taken a view in the light of which Sankaralinga Nadar and Co.s case [1984] 147 ITR 332 (Mad) cannot be held to have laid down the law correctly in all respects. The pronouncement of this court in the said Keshavji Ravji and Co.s case [1990] 183 ITR 1 covers the point raised in these special leave petitionsHowever, 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 corresponding civil appeals and, after setting aside the orders of the High Court, remit the corresponding tax case petitions to the High Court with direction to allow the 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 and Co.s case [1990] 183 ITR 1. 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 the interests of justice would be served by treating the present special leave petition 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 point afresh in the light of the aforesaid pronouncement of this court.

Decision reasoning: 1[ds]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 corresponding civil appeals and, after setting aside the orders of the High Court, remit the corresponding tax case petitions to the High Court with direction to allow the petitions and to direct theAppellate 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 and Co.s case [1990] 183 ITR 1. This procedure would, indeed, be an idle,and wholly avoidable formality in the circumstances of the present cases. As the position is now settled, we are of the opinion that the interests of justice would be served by treating the present special leave petition as directed against and arising from the main appellate orders of theAppellate 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 point afresh in the light of the aforesaid pronouncement of this court.