D.K.Seth, J. - (1.) In this case, the question that is to be answered is : "Whether, on the facts and circumstances of the case, the Tribunal was justified in law in holding that the interest-free advances were given for the purpose of business ignoring the fact that the condition as laid down under the provision of Section 36(1)(iii) of the IT Act were not fulfilled ?" In the facts and circumstances of the case, this question has two aspects. One is related to the transaction between the assessee and the firm alleged to be a firm of relatives, which might have some impact on the transaction. In case we find that it is not a firm of relatives, the answer would be simple and would not assume a different complexion, as it would have if the firm is found to be a firm of relatives. The other question requires to be examined in this context is that whether this interest-free advances were given for the purpose of business entitling the assessee to the benefit of Section 36(1)(iii) of the IT Act, 1961. We may now examine these questions as hereafter.
(2.) The AO had found that the firm to which interest-free loan was advanced was constituted by the relatives of the directors of the assessee. But the relatives as has been explained or spelt out by the AO shows that this relations did not come within the definition of relatives as defined in Section 2(41) of the IT Act, 1961. Therefore, the first point that has been urged by Mr. Banerjee, that the firm with which the assessee was dealing was a firm of the relatives, cannot be sustained. Inasmuch as Section 2(41) defines 'relative' in relation to an individual to mean the husband, wife, brother or sister or any lineal ascendant or descendent of that individual. In this case the relation was sought to be related between the individual office-bearers of the assessee and the firm. Having regard to this definition as mentioned above, the firm can by no stretch of imagination be said to be a firm of relatives of any of the directors of the assessee.
(3.) The next point that has been urged by Mr. Banerjee is that the assessee had a packing credit sanctioned by Syndicate Bank, Nariman Point, Bombay, to the extent of Rs. 25 lakhs. This was enhanced to Rs. 175 lakhs. On the very date of enhancement of the packing credit, a sum of Rs. 165 lakhs was advanced to M/s Malabar Cashew Nut and Allied Products (MCAP) through a cheque drawn on Syndicate Bank, Nariman Point. Therefore, according to Mr. Banerjee, the capital borrowed from the Syndicate Bank was siphoned to MCAP as interest-free advance. He has pointed out from the assessment order that though it was pointed out by the assessee that the advance was made to MCAP for supplying raw materials namely, cashew nut to the assessee, but in fact, it had not supplied any raw material. On the other hand, it had returned the amount in two instalments namely, Rs. 123.8 lakhs on 11th June, 1984, and the balance of Rs. 41.2 lakhs in September, 1984. At the same time, he pointed out to the findings of the AO that the annual accounts of MCAP for the year ended 31st Dec., 1982, revealed that the firm MCAP was insolvent and had a debit balance in the partners' capital for a sum of Rs. 142 lakhs and on 31st Dec., 1983, the debit balance of Rs. 119 lakhs. He further pointed out that the advance was made to MCAP without any security and without any stipulation for payment of interest, whereas the assessee had paid 12 per cent interest on the packing credit to Syndicate Bank. On this ground Mr. Banerjee wanted to emphasize that this advance was not made for business purpose but for some extraneous reasons and, therefore, it could not satisfy the ingredients of Section 36(1)(iii).;