K.C.AGARWAL, J. - (1.) AT the instance of the assessee, the Tribunal referred the following questions of law for our opinion : "1. Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the Departmental authorities were entitled to support the disallowance or addition on account of huge debits in the name of Shri Ram Deo Marolia on the ground that interest bearing loans were utilised by the assessee for non -business purposes which included withdrawals by Ram Deo Marolia also ? 2. If the answer to the question is in the affirmative, whether, on the facts and in the circumstances of the case, the Tribunal was justified in sustaining the disallowance of interest of Rs. 12,320, Rs. 12,060, Rs. 9,300, Rs. 8,760 and Rs. 10,560 ?"
(2.) THE assessee is a firm with three partners. One of the partners of this firm was Ram Deo Marolia. The firm was carrying on business of cotton purchase on commission basis for various cotton mills situated at Kanpur. The partnership was evidenced by a deed of partnership executed on 4th July, 1962. One of the clauses of the said deed, which would be relevant for the purpose of this reference, reads as under : "Interest at the rate of 6per cent per annum shall be charged on the capital of the partners." While dealing with the assessments for the asst. yrs. 1964 -65, 1965 -66, 1966 -67, 1967 -68 and 1968 -69, the ITO found that huge amounts of money had been withdrawn by Ram Deo Marolia. The firm had, however, charged no interest from him in these years. Being of the view that interest was chargeable on the debit balance, the ITO made additions in the aforesaid five years. Aggrieved by the judgment and orders of the ITO made in respect of these five years, the assessee preferred five appeals before the AAC. The AAC did not accept the assessee's submission that as there was no provision for charging interest on debit balance standing in the account of a partnership, the additions made by the ITO were incorrect. He, therefore, dismissed the assessee's appeals on his ground. The assessee carried the matter before the Tribunal. Before the Tribunal the assessee filed certain fresh evidence. On being satisfied that the question of addition of the amount in the assessment of the assessee required reconsideration, the Tribunal remanded the case to the AAC to find out as to whether or not any add -back could be made in the assessment on the basis of accrual of interest on debit balance in the account of Ram Deo Marolia. The AAC called upon the ITO to submit a report on the aforesaid controversy. The ITO heard the assessee and thereafter submitted a report stating that if the additions made in the debit balances of Ram Deo Marolia were not upheld, the interest on borrowings allowed to the assessee -firm should be proportionately disallowed. The AAC, being of the view that interest was rightly charged on the debit balance appearing in the name of Ram Deo Marolia, dismissed the appeals filed by the assessee -firm.
(3.) THE assessee again filed appeals before the Tribunal. The Tribunal disagreed with the ITO and the AAC that Ram Deo Marolia was liable to pay interest on the loans taken by him from the firm. It held that as the partners had orally agreed not to charge interest on the debit balances, the AAC was not justified in holding that interest on the balance to the debit of Ram Deo Marolia accrued to the assessee. The revenue, however, pointed out that if the addition of interest not charged to the partner was decided against the Revenue, the Tribunal should disallow the interest paid on the borrowings not used for business purposes by the assessee -firm. The Tribunal accepted the argument of the Revenue and holding that since the borrowings obtained by the assessee had not been utilised for the business purposes of the assessee, the deduction of interest on the borrowings was liable to be disallowed. It, however, restricted the disallowances to the amounts added on the debit balance standing in the name of Ram Deo Marolia. It was, thereafter, at the instance of the assessee, that the Tribunal referred the two questions mentioned above.;