M.C. Agarwal, J. - (1.) THE Income-tax Appellate Tribunal, Delhi Bench "C", Delhi, has referred the following question stated to be of law and to arise out of its order dated November 23, 1979, passed in ITA No. 2156 (Delhi) of 1978-79 for the opinion of this court : "Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the addition of Rs. 9,616 was rightly made by the Income-tax Officer in determining the total income of the assessee for the assessment year 1975-76 ?"
(2.) WE have heard Sri Shashi Kant Gupta, learned counsel for the assessee, and Sri A. N. Mahajan, learned standing counsel for the Commissioner-respondent. The facts of the case are that the assessee is a partnership firm, while computing its income, the Assessing Officer disallowed Rs. 70,543 in respect of the payment of interest to the partners. This was done in terms of Section 40(b) of the Income-tax Act, 1961 (hereinafter referred to as "the Act"). The assessee appealed to the Appellate Assistant Commissioner contending that the addition to the extent of Rs. 9,616 was bad. The Appellate Assistant Commissioner accepted the assessee's contention. The Assessing Officer appealed to the Tribunal which reversed the decision following a judgment of this court in Sri Ram Mahadeo Prasad v. CIT [1953] 24 ITR 176. There were several partners in the firm to whom interest was paid. Interest was also received from some of them. In so far as the partners to whom interest has been paid as well as interest has been received from them, the Tribunal held that only the net interest paid would be added back under Section 40(b) of the Act. The sum of Rs. 9,616 was, however, interest received by the firm on the debit balance of three partners to whom no interest had been paid by the firm. The Tribunal held that the interest received from those three partners could not be adjusted against the interest paid to others and, therefore, the reduction of the disallowance of Rs. 9,616 by the Appellate Assistant Commissioner was wrong. In Sri Ram Mahadeo Prasad v. CIT [1953] 24 ITR 176 (All), the following question came up for consideration before this court (page 181) : "(2) Whether the excess interest received from the partners of the firm on the amounts overdrawn by them after adjustment against the payments of interest made to them by the firm is taxable income in the hands of the firm ?"
(3.) THIS court held that the interest received from the partners was the firm's income liable to tax and that a disallowance under Section 10(4)(b) of the Indian Income-tax Act, 1922, of the excess of interest paid to a partner was justified. THIS view was repeated in Sri flam Mahadeo Prasad v. CIT [1979] 120 ITR 149 (All). In CIT v. Kailash Motors [1982] 134 ITR 312 (All) also it was held that only the net amount paid by the firm to a partner after adjusting the interest paid by him to the firm could be disallowed under Section 40(b) of the Act. In CIT v. Lakshmi Finance and General Trading Co. [19921 197 ITR 248 also this court repeated the same view following a judgment of the Supreme Court in Keshavji Ravji and Co. v. CIT [19903 183 ITR 1.;