S.K.CHOUDHURI J. - (1.) IN this reference under s. 66(1) of the INdian INcome-tax Act, 1922 (hereinafter to be referred to as 3), by the INcome-tax Appellate Tribunal, Patna, the following question of law has been stated for the opinion of this court, namely : Whether, on the facts and in the circumstances of the case, the sum of Rs. 42,595 accrued as interest on the advances made by the assessee to Messrs. Ramgarh INdustries Coal Co. and is taxable in her hands ?
(2.) THE assessee is Smt. Lalita Rajya Laxmi (wife of Raja Bahadur Kamakhya Narain Singh of Ramgarh). THE assessment year in question is 1956-57. THE assessee was a partner of the firm, M/s. Ramgarh Industries Coal Co. This firm was the managing agent of M/s. Bokaro and Ramgarh Ltd. THE principle place of business of the firm is located at 124, Karnani Mansions, No. 25-B Park Street, Calcutta. THE assessee had 12 annas share, Kumar Chitra Kumar Pal had 3 annas share and Raja Bahadur Kamakhya Narain Singh 1 anna share. This firm was constituted under an indenture dated the 1st March, 1954, which was to continue for 20 days. THE partners were to contribute capital in proportion to their shares. Clause (5) of the indenture of partnership reads thus : If any partner shall with the consent of the majority of the partners bring in additional working capital to that required to him under the last preceding clause the same shall be considered as a debt due to him from the partners and shall bear interest at the rate of six per cent. per annum payable yearly. The assessee, in respect of her income was assessed by the ITO, Hazaribagh. For the aforesaid assessment year for which the relevant accounting period ended on the 31st March, 1956, the assessee filed a return showing a loss of Rs. 1,08,600. The ITO noticed that a sum of Rs. 11,19,396 was advanced by the assessee to M/s. Ramgarh Industries Coal Co. on which the assessee did not charge interest. Accordingly, the ITO calculated interest on that amount at 8 per cent. which came to a figure of Rs. 51,834 and included the same under the head as income from other sources in arriving at the total income of the assessee. The ITO found that the opening balance of the amount lent to M/s. Ramgarh Industries Coal Co. was Rs. 1,82,452 and fresh advances during the year were Rs. 13,11,750 while repayments were Rs. 3,80,805. Thus, the ITO estimated the interest receivable on the advance at 8 per cent. and thus included a sum of Rs. 51,834 in her assessment. Being aggrieved by the said order, the assessee filed an appeal before the AAC of Income-tax of Ranchi Range, Ranchi. It was argued before the AAC on behalf of the assessee that any interest which might possible have been due to the assessee in respect of the loan advanced by her to the firm, was completely relinquished by a release deed dated the 31st March, 1956, executed prior to the assessment year and that consequently no income accrued to her by way of interest on the loan given by her to the firm. The AAC held that interest accrued from day to day on the aforesaid advances that were made by the assessee. He distinguished the case of E. D. Sassoon Company Ltd. v. CIT, 1954 26 ITR 27on the ground that in the case under consideration the remuneration became due and constituted a debt only at the end of each period of service and no remuneration or commission was payable to the managing agents for the broken periods. The AAC held that the ITO was justified in including in the assessment the interest that had accrued to the assessee during the year of accounting on the advances aforesaid. However, the learned AAC reduced the interest from 8 per cent. to 6 per cent. as the assessee was entitled to such rate of interest under the partnership deed. The assessee, thereafter, took the matter before the Income-tax Appellate Tribunal, Patna. The Tribunal found that the firm in which the assessee was a partner had already been assessed under the assessment order dated February 22, 1960, by the ITO, Dist. III(1), F. Ward, Calcutta, as an unregistered firm and its total income was determined at a net loss of Rs. 3,966. Therefore, according to the Tribunal, under s. 16(1)(b) of the act, the ITO, Hazaribagh, during the assessment proceeding of the assessee for the relevant year, was entitled to take note of the assessees share inclusive of interest as reported by the ITO, Calcutta, who assessed the firm. On this ground the amount of interest receivable by the assessee from the firm was excluded from the assessment of the assessee. It held that it was not open to the ITO, Hazaribagh, to determine separately the alleged amount of interest receivable by the assessee from the firm in which she was a partner. The department not being satisfied with the order of the Tribunal got the present reference made. I have already given above the question of law referred to this court for its opinion. It appears that this tax case was listed for hearing before a Bench constituted of the Chief Justice and B. D. Singh J. The said Bench by an order dated 22nd April, 1968, called for a further statement of the case under sub-s. (4) of s. 66 of the Act directing the Tribunal to give a further opportunity to the parties to adduce additional evidence, if so desired, and hear them before submitting the supplementary statement of the case. The Division Bench was of the opinion that the question as formulated could not be answered on the finding arrived at by the Tribunal. It found that the Tribunal had not decided the question of facts as to whether the assessees method of accounting was mercantile or cash basis. The Tribunal had also not decided as to whether any interest accrued to the assessee from the said loan in spite of a deed of release dated the 31st of March, 1966, or on the basis of the argument advanced by the assessee that the money was given as a simple investment without the idea of earning any interest. The Division Bench also found that the Tribunal did not examine the correctness of the reasoning of the AAC that interest on the money advanced accrued from day to day and not at the end of the accounting period. The Division Bench, therefore, was of the opinion that it was not possible to say whether, on the facts and in the circumstances of the case, Rs. 42,596 accrued as interest to the assessee from the firm. The Bench observed that the second question whether it was taxable in the hands of the assessee would obviously depend on the answer to the first question. At this stage it will be relevant to quote the following paragraphs of the judgment of the High Court. They read thus :
(3.) IT is true that it was open to Tribunal to hold (as it has done in the main order dated 22nd April, 1964) that the question as to whether Rs. 42,595 accrued as interest to the assessee was academic and that the Income-tax Officer of Hazaribagh had no jurisdiction to assess her in respect of that income unless a proper report was sent by the Income-tax Officer of Calcutta, who assessed the unregistered firm. But, in that view, the question formulated for opinion of this court would not arise. The question them should have been formulated differently as a pure question of law arising on the view taken by the Tribunal regarding the jurisdiction of the Income-tax Officer to assess the assessee on the interest that accrued to her from the loan advanced to the unregistered firm. But the question actually formulated (discussed above) shows that this court is called upon to decide whether on the facts and in the circumstances of the case the sum of Rs. 42,595 accrued as interest to the assessee. This question cannot be decided in the absence of further findings on the facts as indicated above. Similarly, the later part of the question whether the said sum is taxable in her hands may become academic if the Tribunal holds that the said sum did not accrue as interest to her. Both questions are mixed questions of law and fact. The final court of fact must first decide on a careful consideration of the deed of release and other circumstances, as to whether any interest had in fact accrued to the assessee or was received by the assessee during the relevant year. This may, to some extent, depend on what the Tribunal will consider to be the proper method of accounting of the assessee i.e., whether it was mercantile or cash basis. It is only after the Tribunal first gives the answer to this question that the subsequent legal question as to whether the Income-tax Officer, Hazaribagh, had jurisdiction to include the amount in the income of the assessee without awaiting a report from the Income-tax Officer, Calcutta, would arise for consideration. I am, therefore, of the opinion that sub-section (4) of section 66 of the Act should be applied, and the case should be sent to the Appellate Tribunal with a direction to decide, firstly, what was the method of accounting adopted by the assessee and, secondly, whether any income by way of interest either accrued to, or was received by, the assessee during the relevant year bearing in mind the deed of release dated the 31st March, 1956. The Tribunal may give the parties a further opportunity to adduce additional evidence, if so desired, and hear them before submitting the supplementary statement of the case as indicated above. Costs will abide the result. The reference is answered accordingly. Thus, the view of the aforesaid judgment of the High Court, a supplementary statement of facts was sent to the High Court. In this supplementary statement the following findings have been given : ;