R.K.Agrawal J. - (1.) The Income-tax Appellate Tribunal, Allahabad, has referred the following question of law under Section 256(2) of the Income-tax Act, 1961, hereinafter referred to as "the Act", for the opinion to this court : "Whether, on the facts and circumstances of the case, and having regard to the terms and conditions of the original partnership deed and also in view of the provisions of Section 13(c) of the Partnership Act was it not open to partners to change its course, when they realized that the interest on the debit balance of one of the partners was being charged erroneously, and the findings recorded by the Appellate Assistant Commissioner and confirmed by the Tribunal that the agreement dated February 20, 1975, was afterthought and not relevant are based on relevant consideration and liable to be sustained?"
(2.) Briefly stated the facts giving rise to the present reference are as follows : The present reference relates to the assessment years 1976-77 and 1977-78. The applicant is a firm consisting of three persons, namely, Smt. Lilawati Narang, Shri V. P. Narang and Sri R. K. Narang. During the course of the assessment proceedings for the assessment year 1976-77 the Income-tax Officer raised the following query vide letter dated November 23, 1978 : "Smt. Lilawati Narang was owing to the firm an amount of Rs. 1,21,654 as on December 1, 1975, and was further allowed to withdraw Rs. 18,782 especially when the firm was returning losses and had to pay interest to the creditors for investment purposes. Please state as to why proportionate interest may not be disallowed as not incidental to business."
(3.) The applicant vide letter dated November 24, 1978 replied as follows : "Smt. Lilawati Narang has a debit balance ever since the firm was constituted by her after inheriting the factory from her husband the late Sri Kesar Ram Narang and the drawings made by her are for the usual and normal drawings and no investment by her out of the withdrawals and the amount borrowed by the firm was for the purpose of business only and not for investment by her individually. Therefore, there is no question of disallowing proportionately interest.";