A.K. Sengupta, J. - (1.) The assessee is a registered-firm. The original assessment of the assessee-firm was completed on October 31, 1962. In the original assessment, the assessee-firm claimed interest of Rs. 34,895 on hundi loans appearing in the books of the assessee. The said interest was allowed while completing the original assessment. Thereafter, materials came into the possession of the Income-tax Officer that the said hundi loans were not genuine and fictitious. Accordingly, the assessment was reopened under Section 147(a) of the Income-tax Act, 1961 ("the Act"). In response to the notice under Section 148 of the Act, the assessee filed a return showing total income of Rs. 99,113 being the income determined in the original assessment as modified on appeal. Before the Income-tax Officer, it was stated by the assessee that the hundi loans were disclosed by the partners of the firm with interest under Section 68 of the Finance Act, 1965. However, the Income-tax Officer rejected the contention of the assessee and held that since the payment of interest on bogus hundi loans has been claimed in the assessment of the firm, the interest must be added back in computing the total income of the firm. The Income-tax Officer also observed that the addition of such interest was upheld in earlier years by the Appellate Assistant Commissioner. The Income-tax Officer, therefore, added back the sum of Rs. 34,895 to the income of the assessee. The assessee preferred an appeal before the Appellate Assistant Commissioner, The Appellate Assistant Commissioner followed the order of the Tribunal in the case of Vijay Industries, Calcutta, where the Tribunal held that the interest disclosed under Section 68 of the Finance Act, 1965, by the partners was not once again includible in the firm's assessment. The Appellate Assistant Commissioner held as follows : "I have also gone through the contents of the disclosure petition submitted by the appellant and have found that the partners making the disclosure have surrendered for taxation under Section 68 of the Finance Act, 1965, the interest on the loans brought into this firm and other firm's accounts in the garb of inclusion of the interest on bogus hundi loans amounting to Rs. 34,895 in pursuance of the reassessment proceedings under Section 147(a) of the Income-tax Act, 1961, was unjustified (sic)." He, therefore, deleted the said addition.
(2.) The Department preferred an appeal before the Tribunal. The Tribunal followed its order in Income-tax Appeal No. 3762 (Cal) of 1969 and held that the contentions of the representative of the parties are the same which were raised in the said appeal and so were the facts and circumstances in that case as in the present one. Therefore, the Tribunal followed the said order and dismissed the appeal of the Department.
(3.) At the instance of the Commissioner, the following questions of law have been referred to this court under Section 256(2) of the Act : "1. Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the sum of Rs. 34,395 (Rupees thirty-four thousand three hundred and ninety-five only) being the interest paid by the assessee to its partners in respect of bogus hundi loans is an allowable deduction in computing the income of the assessee, a registered firm, on the ground that the said amount had been subjected to tax as a result of disclosures made by the partners ? 2. Whether, on the facts and in the circumstances of the case and in view of the provisions of Section 40(b) of the Income-tax Act, 1961, the Tribunal was right in law in allowing the interest paid by the assessee-firm to its partners ?";