- (1.) These Special Leave Petitions arise out of and are directed against the orders of the High Court of Judicature at Madras disposing of references made under S. 256(1) of the Income-tax Act 1961 (Act for short) in Tax Cases Nos. 694 of 1982, 565 of 1980, 1404 of 1980, 637 and 638 of 1981, 521 of 1981, 429 of 1983 and 572 of 1983. The High Court following its earlier pronouncement of that Court in Commr. of Income-tax v. O.M.S.S. Sankaralinga Nadar and Co.,(1984) 1471TR332:(1984 Tax LR 89) (Madras) answered the question of law, similar in all the cases, in favour of the revenue. The question was whether in making a disallowance for the interest paid by a partnership firm to a partner under S. 40(b) of the Act the interest, in turn, paid by the partner on his borrowings from the firm should be taken account of and deducted and only the balance disallowed under S. 40(b). On this question, there is a sharp divergence of judicial oinion in the High Courts. In Sri Ram Mahadeo Prasad v. C.I.T. (1953) 24 ITR 176: (AIR 1953 All 779) C.I.T. v. Kailash Motors (1982) 134 ITR 312 (All); C.I.T. v. T.V. Ramanaiah and Sons, (1985) 157 ITR 300:(1985TaxLR748)(AndhPra);C.I.T.v. Kothari and Co., (1987) 165 ITR 594 (Kant); C.I.T. v. Balaji Commercial Syndicate, (1987) 165 ITR 596 (Kant); C.I.T. v. Motilal Ramjiwan and Co., (1988) 171 ITR 294 (Raj); C.I.T. v. Precision Steel and Engg. Works, (1989) 179 ITR 283 : (1990 Tax LR 96) (P and H), the High Courts have taken the view that where a firm pays interest to its partner and the partner also pays interest to the firm, only the net amount of interest paid by the Firm to the partner is liable to disallowance under Section 40(b) of the Act. However, in C.I.T. v. O.M.S.S. Sankaralinga Nadar and Co., (1984) 147 ITR 332: (1984 Tax I.R 89), the High Court of Madras has taken a contrary view.
(2.) We have heard Sri Ramachandran, learned senior counsel for the appellants and Sri Manchanda, learned Senior Counsel and Sri S.B. Ahuja for the revenue. Special Leave is granted. The appeals are taken up for final hearing, heard and are disposed of by this common judgment.
(3.) We may refer to the facts in SLP(C) No. 14291/1985 which is representative of and typifies the context in which the question arises. The appellant, M/ s. Kestavji Ravji and Co. is a registered-firm consisting of 6 partners and carries on a business in tile manufacture of and export of stainless steel articles. In the accounting year ended 13-11-1974, corresponding to the assessment year 1975-76, the firm paid interest to the partners on the amounts standing to their respective credits in the firm. The firm also received from the partners interest on their borrowings from the firm. For the relevant assessment year, the appellant filed a return disclosing a total income of Rs. 2,55,225. The Income-tax Officer while disallowing the amount of interest paid to partners did not set-off the interests received from the partners on their own borrowings. With this disallowance, the income of the firm was assessed at Rs. 2,79,730. In the assessee's appeal, the Appellate Assistant Commissioner of Income-tax by his order dated 18-10-1977 allowed the claim of the appellant that only the net interest paid to the partners, after setting-off the interest received from them was to be disallowed. The Revenue took up the matter in further appeal before the Income-tax Appellate Tribunal which by its order dated 6-1-1979 dismissed the appeal and affirmed the appellate order of the Assistant Commissioner. The Tribunal, as did the Appellate Assistant Commissioner, placed reliance on the decision of the Allahabad High Court in SriRam Mahadeo Prasad v.C.I.T. (1953) 24 ITR 176: (AIR 1953 All779). At the instance of the revenue the Tribunal stated a case and referred the following question of law for the opinion of the High Court. "Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was correct in holding that net interest should be disallowed under S. 40(b) of the Incometax Act, 1961 - This reference under S. 256(1) of the Act was registered in the High Court as Tax Case No. 694/ 82 and the High Court by its order dated 5-3-1985 answered the question in the negative and against the appellant relying, as stated earlier,on its earlier pronouncement in Sankaralinga Nadar's case (1984 Tax LR 89) (Madras). Broadly, similar are the circumstances under which the other appeals arise.;