S.K.Sen, J. - (1.) In the instant reference under section 256(2) of the Income Tax Act, 1961 (In short I.T. Act) for the assessment year 1984-85 by the Income Tax Appellate Tribunal (Tribunal) three questions arise at the instance of revenue and three at the instance of the assessee. The decision in the appeal before the Tribunal was in favour of the assessee. The questions at the instance of the assessee have been sought for in respect of some points on the issue only because the reference was sought for by the department against the order of the Tribunal. The questions of law at the instance of the department are as follows: In respect of order of CIT (A) dated November 3,1987. 1. "Whether, on the facts and in the circumstances of the case, the Tribunal was correct in law in holding that the accrual of interest on the loan advance by the assessee company to M/s. Shri Ambica Jute Mills Ltd. was not proper and in that view deleted the accrued interest of Rs. 1,15,625 for the period from 1.6.83 to 31.8.83 from the total income of the assessee?" In respect of order of CIT (Admn.) dated March 15, 1989. 1. "Whether, on the facts and in the circumstances of the case, the Tribunal was correct in law in holding that the interest accrued for the period from 1.9.83 to 31.3.84 in respect of the loan advanced by the assessee company to M/s. Shri Ambica Mills Ltd. should not be added to its income and therefore, the order passed by the commissioner of Income Tax under section 263 of the I.T. Act. 1961 was not called for?
(2.) Whether on the facts and in the circumstances of the case, the Tribunal was correct in law in holding that there was no basis for passing order u/s. 263 of the I.T.Act by the commissioner of Income Tax?" 2. The questions at the instance of the assessee are as follows: "In respect of order of CIT (A) dated March 15, 1989. 1. "Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the issue raised by the Commissioner of Income Tax Act, 1961 had not merged in the order dated 3.11.87 of the Commissioner of Income Tax (Appeals) Calcutta and as such the commissioner has jurisdiction under section 263 of the Act? 2. Whether the Tribunal was right in law in holding that any income from interest for the period from 1.9.83 to 31.3.84 accrued to the assessee and whether such finding of the Tribunal is unreasonable and perverse not being based on any material?" In respect of order of CIT (A) dated November 3, 1987. 1. "Whether, the Tribunal was right in law in holding that any income from interest accrued to the assessee during the relevant previous year and whether such finding of the Tribunal is unreasonable and perverse not being based on any material?"
(3.) The facts inter alia involved in the instant reference are set out hereinafter: The assessee is a wholly owned subsidiary of Kusum Products Ltd. Its main activities are to invest the funds obtained from its holding company in the financing business. The assessment year involved is 1984-85, the relevant previous year being the accounting year ended March 31, 1984. The assessee paid a sum of Rs. 23,84,375 to Shri Ambica Jute Mills Ltd. on June 2, 1983 against three Hundis all dated June 1, 1983 for Rs. 10 lakhs, Rs. 10 lakhs, and Rs. 5 lakhs totalling to Rs. 25 lakhs. The said Hundis were co-accepted by the Punjab National Bank, Shyambazar Branch, Calcutta. The due date for payment of the said Hundis was August 31, 1983. When the said Hundis were presented to the Punjab National Bank on September 1, 1983 the Bank refused to honour the same on the ground that they were not recorded in its books. The Bank disowned the said Hundis as documents executed by it. For the period up to March 31, 1984 the assessee could recover only Rs. 2,50,000 from the said M/s. Ambica Jute Mills Ltd. In view of the fact that the Hundis were disowned and there was no hope of recovery of the said sum from the Bank and /or the said M/s. Ambica Jute Mills Ltd. , the Directors of the assessee passed a resolution on November, 24, 1983 to the effect that no interest be charged or accounted for, on the said sum with effect from June 1,1983 i.e. the date on which the said sum of Rs. 23,84,375 was paid against the said Hundis of Rs. 25 lakhs. The assessee did not account for any interest in its books of account.;