Isaac, J. -
(1.) THESE two references have been made by the Madras Bench of the Income-tax Appellate Tribunal under Section 66(2) of the Indian Income-tax Act, 1922, as directed by this court on the applications made by the assessee. THESE cases relate to the assessment years 1960-61 and 1961-62. The questions referred in the first case are :
" 1. Whether, on the facts and in the circumstances of the case, the inferences of the Tribunal that Vijayamohan Metal Printers owned by the assessee, his wife and minor children has nothing to do with the business of the assessee and that the interest incurred by the assessee for raising loan for the purpose of the said business is not an allowable item of expenditure in computing the income of the assessee were justified ?
(2.) WHETHER, on the facts and in the circumstances of the case, the Tribunal was justified in inferring that out of the total loan raised during the accounting year, the sum of Rs. 1,32,081 could not be considered as for the purpose of his business, that it could only be in respect of the debit balance in the profit and loss account and that the assessee is not entitled to claim as a business expenditure the interest due on the said amount ? "
2. There is only one question in the second case; and it is the same as question No. 1 in the first case.
Daring the year ended December 31, 1959, the assessee was conducting a tin factory for manufacture of tin containers; and he was also exporting cashew kernels and conducting a saw mill. Formerly, he was running a stage carriage business under the style of Vijayalakshmi Motors. This business was sold away in 1956 with all the vehicles. Some years ago he worked a forest coupe at Nagercoil. He had another saw mill under the name Asramam Saw Mills, which he leased out in 1953. But he resumed this business in October, 1956. He also owned a cashew factory in the name of Eastern Exporting Corporation which he leased out in 1954. But he resumed this business in 1959. Advances made by the assessee for the aforesaid four businesses were shown in the accounts of the tin factory. The total balances as on December 31, 1957, were the following :
All the above four amounts, which would make a total of Rs. 2,84,759.64, were debited in the profit and loss account of the assessee on 1st January, 1958, along with two other items amounting to Rs. 4,87,527.48. The total of these debits came to Rs. 7,72,287.12. The total credits in the above account on the above date was Rs. 4,08,48T73 ; and this represented the net profit from 1946 to 1957. Income during the year 1958 came to Rs. 83,292.37. The net position in the assessee's profit and loss account as on December 31, 1958, was a debit of Rs. 2,80,513.02. This was brought forward to the year 1959; and the balance-sheet for the assessee's tin factory for the year ended December 31, 1959, showed the above amount as a debit balance.
(3.) THE assessee has formed a partnership along with his wife and minor children under the style of Vijayamohan Metal Printers with the object of setting up a tin printing factory. This business has not commenced production. Certain amounts were advanced to the above firm from the assessee's tin factory business; and their total as on December 31, 1959, came to Rs. 1,68,334.
The assessee's income from the tin factory for the year 1959 as per his books of account was Rs. 82,629. His total borrowings during this year as per the said books came to Rs. 9,70,357. In arriving at the above income, the assessee claimed a deduction of Rs. 72,941 as interest on loans. The Income-tax Officer found that, out of the above borrowings, Rs. 5,65,498 had been diverted for non-business purposes ; and he, accordingly, disallowed a proportionate part of the interest, which the assessee claimed to deduct. The aforesaid sum of Rs. 5,65,498 included Rs. 1,68,334 advanced to the assessee's firm, and Rs. 2,80,513.02 debited in the profit and loss account of the assessee, as already stated. Regarding the advance to the firm, the assessee contended that the partnership business was an extension of his own business ; that, as the income of the firm would be deemed as his income under Section 16(3) of the Act, the advance made to the firm was an amount spent for his own business, and hence the interest incurred by the assessee for raising loan for the business of the firm was an allowable expenditure. This contention was repelled by the Appellate Tribunal as well as the subordinate authorities. Question No. 1 in the first reference case relates to this matter.;