- (1.) This appeal under Section 260A of the Income-tax Act, 1961 is at the instance of an assessee and is directed against order dated 22nd August, 2002, passed by the Income-tax Appellate Tribunal, "B" Bench, Kolkata, in Income-tax Appeal No.1036 (Cal) of 1997 for the Assessment Year 1993-94 and thereby partly allowing the appeal filed by the Revenue.
(2.) Being dissatisfied, the assessee has come up with the present appeal. The facts giving rise to filing of this appeal may be summed up thus: a) The appellant is a registered Partnership Firm carrying on business of giving loans and advances and the present appeal arises out of assessment for the Assessment Year 1993-94, of which the Previous Year ended on 31st March, 1993. b) For the Assessment Year under consideration, the appellant filed a return of income on 3rd February, 1994 disclosing the total income of Rs.1,41,540/-. The return was processed under Section 143(1) (a) of the Act and notice was issued under Section 143(2) of the Act. In making the assessment, the Assessing Officer disallowed the interest receivable on account of loan debtors against the interest debited by the assessee payable to the loan creditors for Rs.25,71,523/-. c) Being dissatisfied, the appellant preferred an appeal before the Commissioner of Income-tax (Appeals). On consideration of the submission made by the appellant, the Commissioner of Income-tax (Appeals) allowed the claim of the appellant amounting to Rs.13, 03,140/- relating to interest liability. d) The CIT (Appeals) held that since the assessee was mainly engaged in money lending business, it would not be feasible to require it to establish as one-to-one co-relation between the money going out as the loans advanced and the money coming in as the loans borrowed. It was further held that it was clear that Rs.73,24,200/- appeared as minimum of the amount for six years by which the aggregate amount of loan given exceeded the total amount of loan taken and thus, it was logical that the amount to the extent of Rs.73,24,200/- was available as rolling from the own fund of the assessee. According to the CIT (Appeals), the interest computed at the rate of 15% per annum on Rs.73,24,200/- worked out at Rs.10,98,630/- and the same amount could be treated as outside the scope of disallowance on the ground that the interest from advances to the extent of Rs.73,24,200/- could be treated as coming out of the assessee's own generated funds in respect of which it was not required to incur any liability on account of interest payable on the borrowed money. It was further held that in working out the disallowance out of the amount of interest debited to the profit and loss account, the assessee should be allowed the benefit accruing from liberty to advance loans aggregating to Rs.73,24,200/- free from interest without in any way adversely affecting its claim for deduction of interest liability. Thus, the CIT (Appeals) deleted the addition of Rs.24,01,770/- and restricted the disallowance to Rs.1,39,753/-. e) Being dissatisfied, the Revenue preferred an appeal before the Tribunal below and the Tribunal by the order impugned set aside the order passed by the Commissioner of Income-tax (Appeals) and remanded the matter to the Assessing Officer to decide the aforesaid issue afresh in accordance with law and in the light of the observations made in the body of the order after giving reasonable opportunity of hearing to the parties. According to the Tribunal, the notional interest income cannot be taxed but it the borrowed funds had been diverted to interest free advances, then certainly the interest payable on borrowed funds is not allowable. The Tribunal held that as all the material details whether the interest free advances were related to the business or not, and the interest paid on the total amount of borrowed fund and the rate of interest paid on borrowed funds were not available from records, the issue should be decided afresh after giving opportunity of hearing to the assessee. The Tribunal, however, made it clear that the disallowances of interest would be restricted to the extent of interest paid/payable on borrowed sum only and the disallowances of interest proportionately or otherwise would be calculated by the rate of interest on which the interest was paid or payable on borrowed funds. The Tribunal further repeated that no tax would be leviable on notional interest but the interest paid on borrowed funds should be disallowed if the same was not utilized for business purpose f) Being dissatisfied, the assessee has come up with the present appeal.
(3.) At the time of admission of this appeal, a Division Bench of this Court formulated the following substantial questions of law for decision: "(i) Whether on proper interpretation of Section 36(1)(iii) of Income Tax Act, 1961 the direction of the Tribunal that if borrowed funds have been diverted to interest free advance then interest payable on borrowed funds is disallowable is sustainable in law. "(ii) Whether the Tribunal acted legally is directing to disallow interest proportionately or otherwise by calculation of the rate of interest on which the rate of interest was paid or payable on borrowed funds. "(iii) Whether on the facts and in the circumstances of the case the order of remand by the Tribunal is in accordance with law.";