SUHAS CHANDRA SEN, J. - (1.) THE Tribunal has referred the following two questions of law under s. 256(1) of the IT Act, 1961: "(1) Whether on the facts and in the circumstances of the case the Tribunal was justified in holding that the assessee was not entitled to deduction of Rs. 23, 25, 280 on account of interest ? (2) Whether on the facts and in the circumstances of the case the Tribunal was justified in holding that the assessee was not entitled to deduction of Rs. 31,13,115 as bad debt ?" In this case the relevant assessment year is 1975-76 for which the accounting year is the period ended on R.N. of Sambat 2031 (year ending in March/April 1975). The assessee had made an application under s. 256(2) of the IT At, 1961 to refer certain question of law, which had not been referred by the Tribunal and this Court reframed the question and issued Rule in Matter No. 3906 of 1988. The question is as under: "Whether the finding of the Tribunal that the assessee shall not be entitled to deduction of Rs. 31,13,115 as bad debt is based on any evidence or contrary to the evidence on record or whether such conclusion is otherwise unreasonable or perverse ?" The rule was made absolute on 6th Feb.,1989. Since paper book has already been filed in respect of ITR No.328 of 1987 and all the facts are before us, we have decided to dispense with filing of a separate paper book and a separate statement of case and dispose of this reference alongwith the question that has been directed to be referred by this Court under s. 256(2) of the IT Act, 1961.
(2.) THE first question relates to deduction of an amount of Rs. 23,25,280. The facts found by the Tribunal have been set out in the statement of case, which are as under: "The assessee claimed deduction of Rs. 23,25,280 on account of interest payable to Chandpur Jute Co. on the investment made with the assessee firm. The contention of the assessee was that the loan was taken by it during the years from 1951 to 1956 @ 4.5 per cent p.a. The assessee followed the mercantile system of accounting. It was also its contention that the genuineness of the loan was never disputed by the IT authorities. The creditor filed a suit being suit No. 1490 of 1969 against the assessee firm in the High Court at Calcutta in the year 1969 for Rs. 3,70,97,475 including interest till the date of filing of the suit with a prayer for grant of interest pendente lite and future. The assessee disputed the claim in toto on various grounds including that the suit was barred by limitation. The main contention of the assessee in the said suit is that the said creditor was its own benamidar and was not the real owner of the funds. According to the assessee the creditor was a name lender to act as a conduit pipe for flowing of the funds from Bengal Jute Mills Ltd. to it and nothing was owed by the assessee to the creditor. The said suit is still pending before the Calcutta High Court. Nothing was paid by the assessee to the said creditor after 14th Sept.,1968 either towards principal or towards interest. The ITO observed that even if any interest became payable by the assessee to the creditor that would be payable under the order of the Court under s. 34 of the CPC and that was disallowable item. The CIT on appeal upheld the order of the ITO. The assessee preferred a further appeal to the Tribunal. The Tribunal examined the facts and dates and came to the conclusion that the ITO was right in disallowing the claim of the assessee. A point has been taken by the assessee that the genuineness of the loan has not been questioned by the Department in the earlier years and it has not been questioned even now. The ITO specifically has said that the records of Chandpur Jute Co. the alleged money lender reveal that the claim of the assessee firm was disputed in the suit being Suit No. 1490 of 1969 filed by Chandpur Jute Co. The suit was still pending before the High Court at Calcutta. From the copies of the plaint petition and affidavit-in-opposition it appears that no amount of interest was being received by Chandpur Jute Co. from Soorajmull Nagarmull for a long time past and the suit was instituted for recovery of the principal amount together with interest accrued thereon. In the affidavit-in-opposition Soorajmull Nagarmull denied the existence of loan due to Chandpur Jute Co. It was stated that nothing was owing to Chandpur Jute Co. and that the said company was at no material point of time in a position to make any investment of Soorajmull Nagarmull. The ITO also observed that apart from the merit of the assessee's explanation regarding the genuineness of the loan credited to the books of account in the name of the company, question remains that the alleged loan credited was disputed by the creditor in money suit filed by them,. which is also still pending. From this it cannot be inferred that the ITO, had held that the loan transaction was genuine. On the contrary, according the ITO, apart from the genuineness of the loan there was no other reason why he was not willing to allow the interest as deductible." The Tribunal's findings are based on the facts that have been brought on record. The Tribunal noted that the assessee had stated in the written statement filed in the suit that the suit was barred by the law of limitation. It had further stated that all the acknowledgements given by the assessee and relied upon by the creditor were denied. The liability of the creditor had been denied by the assessee in toto. The Tribunal observed, where the claim of the creditor for principal is itself in litigation, the result of which is unknown, it was futile to make an exercise for knowing the probable pendente lite interest,. The Tribunal ultimately on review of the facts came to the conclusion that the claim of deductibility of interest could not be allowed in the facts of this case.
(3.) IT has been argued before this Court that the Tribunal has misunderstood the materials that were placed before it. Reliance was placed on the written statement that was filed in the suit No. 1490 of 1969 filed by Chandpur Jute Co. against Surajmull Nagarmull, a firm duly registered under the Indian Partnership Act. The written statement was affirmed by one Mohan Lal Jalan, a partner of the defendant firm, who stated that he was fully acquainted with the facts and circumstances of this case. In the written statement it was averred that there was no real transaction between the plaintiff and the defendant in the manner alleged or otherwise or at all. It was specifically denied that any money was actually lent or advanced or that such moneys were really repayable with interest as alleged or at all. The suit was based on the entries in the book of accounts which were fictitious. It was further averred in paragraph 6 that as there was no real money lending transaction between the parties, the question of actual payment of any interest did not arise. It was denied that any moneys were really lent or advanced to the defendant or repaid by the defendant or that there was any agreement as to the alleged rate of interest. The entire case in the plaint was fictitious and the correct position appears from the written statement. It was further averred in paragraph 7 that the allegations regarding loans and advances and repayments were denied because no real or genuine transaction took place between the parties. In paragraph 9 it was averred that the question of making any payment to the plaintiff never arose because nothing was due or owing by the defendant to the plaintiff.;