Case ID: 6325

Judgment:
vil 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. 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 or ' the Tribunal	 having regard to the earlier pronouncement of the High Court in C.I.T. vs O.M.S.S. Sankaralinga Nadar & Co.	 ITR 332 on which the Tribunal had relied. 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. vs C.I.T.	 ; 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. 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. 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. There will	 however	 be no order as to costs. N.P.V. Appeals al lowed.

Summary:
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. vs O.M.S.S. Sankaralinga Nadar & Co.	 	 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. vs C.I.T.	 ; that where two or 269 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.	 ; 	 followed. C.I.T. vs O.M.S.S. Sankaralinga Nadar & Co.	 	 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. vs C.I.T.	 [1990] 1 S.C.R.243. [271E F]