K. Venkataswami, J. - (1.) The question that has been referred to this Court under S.257 of the Income-tax Act, 1961 (thereinafter called "the Act") reads as follows:-"Whether on the facts and circumstances of the case, the assessees claim to the benefit of clause (b) of S.40 of the Income-tax Act, 1961 has been rightly disallowed -
(2.) The assessment year in question is 1976-77. The case of the assessee firm was that M/s. Shanti Kumar Jain, Ashok Kumar Jain, Raj Kumar Jain and Niranjan were partners in the firm in their capacity as Karta of respective HUF. They have advanced monies to the assessee firm in their individual capacity. The assessee firm paid interest to them on the investments made in their respective individual capacity. It is the further case of the assessee firm that it has maintained two separate ledger accounts of the partners; one of individual as loan creditor and another of Karta of HUF as partners in the firm. The sources of the money, according to the assessee, are quite separate. The assessee firm claimed that the interest paid to them shall not be included while computing the income chargeable under the head "profits and gains of business or profession." Notwithstanding such claim, the Income-tax Officer applied S. 40(b) of the Act and completed the assessment by Order dated 29-1-1978. The result was that the interest paid to the partners in the circumstances stated above was included under the head "profits and gains of business or profession."
(3.) On appeal to the Appellate Assistant Commissioner, the assessment was confirmed by an Appellate Order dated 27-8-1980. Still aggrieved, the assessee firm preferred further appeal to the Income-tax Appellate Tribunal. The Tribunal relying upon an unreported decision of the Patna High Court in Tax Case No. 83- 84 of 1971 in the case of M/s. Makhan Lal Harnarayan v. Commissioner of Income-tax. Bihar, confirmed the view taken by the Income-tax Officer and upheld by the Appellate Assistant Commissioner. In view of the divergence of views among the High Courts on the application of S. 40 (b) of the Act, the issue has been referred to this Court.;