(Appeals by special leave from the orders dated 7th November, 1985, 12th August, 1985, February 6, 1985, and 24th July, 1986, respectively of the Madras High Court in T.C.P. Nos. 739 of 1985, 3.13 of 1985, 260 of 1984 and 42 of 1986).

(a) Income-tax---

----Supreme Court---Practice--Reference---Decision of Appellate Tribunal following High Court decision---Tribunal and High Court rejecting application for reference---Final pronoucnement of Supreme Court covering point on merits resulting in decision of High Court being incorrect---Special Leave petition against refusal to call for reference---Converted to one against decision of Tribunal on merits to avoid time-consuming formality-- Constitution of India, Art.136.

(b) Income-tax--

----Firm---Business expenditure---Disallowance---Interest paid to partner-- Interest paid by partner---To be set-off before disallowance---India Income Tax Act, 1961, S.40(b) (before amendment in 1984).

Following the decision of the Madras High Court in the case of Sankaralinga Nadar and Co. (1984) 147 ITR 332, the Appellate Tribunal had held that what was disallowable under section 40(b) of the Income-tax Act, 1961, in computing the profits of the appellant firms was the entirety of interest paid to their partners without reference to any interest in turn paid by the partners. Both the Tribunal and the High Court having rejected the applications of the appellants for reference, the appellants preferred special leave petitions to the Supreme Court to appeal against the orders of the High Court declining to call for the statement of case. Since the Supreme Court had, in Keshavji Ravji and Co.'s case (1990) 183 ITR 1, taken a view in the light of which Sankaralinga Nadar and Co.'s case could not be held to have laid down the law correctly in all respects, and with a view to avoiding time-consuming formality, the Supreme Court treated the special leave petitions as ones directed against the respective appellate orders of the Tribunal on merits, allowed the petitions so treated, set aside the appellate orders of the Tribunal and remitted the matters to the Tribunal for fresh disposal of the appeals before the Tribunal in the light of the decision of the Supreme Court in Keshavji Ravji and Co.'s case.

Keshavji Ravji and Co. v. C.I.T. (1990) 183 ITR 1 (SC) fol.

C.I.T. v. O.M.S.S. Sankaralinga Nadar & Co. (1984) 147 ITR 332 (Mad.) ref.

T.A. Ramachandran, Senior Advocate with Mrs. Janki Ramachandran Appellants for Appellants.

S.C. Manchanda, Senior Advocate with B.B. Ahuja and Miss A. Subhashini for Respondents.

JUDGMENT

VENKATCHAALIAH, J.---These four petitions for grant of special leave arise out of the orders of the High Court of Judicature at Madras in the corresponding four tax case petitions, rejecting the assessees' applications under section 256(2) of the Income-tax Act, 1961 and the reference of a question of law whether the disallowance under section 40(b) of the Income tax Act, 1961 ("the Act") of the interest paid by a firm to its partner should be the gross amount of such interest or should be confined to the net amount after setting off the interest, in turn, paid by the partner to the firm on his borrowings from the firm.

In each of these cases, the Income-Tax Appellate Tribunal had, in substance, held that what was disallowable was the entirety of the interest paid by the firm to the partner without reference to any interest that may, in turn, have been paid by the partner to the firm. The Tribunal, in the appeals preferred by the Revenue before it, allowed the appeals and reversed the view to the contrary taken in favour of the assessees by the first appellate authority. The Tribunal also declined to state a case and refer a question of law under section 256(1) of the Act to the High Court; whereupon the assessees moved the aforesaid tax case petitions before the High Court under section 256(2). The High Court rejected these applications on the view that there was no referable question of law arising out of the appellate orders of the Tribunal, having regard to the earlier pronouncement of the Madras High Court in C.I.T. v. O.M.S.S. Sankaralinga Nadar and Co. (1984) 147 ITR 332, on which the Tribunal had relied.

The correctness of the decision of the Madras High Court in the said Sankaralinga Nadar's case (1984) 147 ITR 332 has come to be examined by this Court in Keshavji Ravji and Co. v. C.I.T. (Special Leave Petition No.14291 of 1985 and connected cases) and by the judgment dated February 5, 1990, (1990) 183 ITR 1 (supra), this Court has taken a view in the light of which Sankaralinga Nadar and Co.'s case (1984) 147 ITR 332 (Mad.) cannot be held to have laid down the law correctly in all respects. The pronouncement of this Court in the said Keshavji Ravji and Co.'s case (1990) 183 ITR 1 covers the point raised in these special leave petitions.

However, as the present special leave petitions arise out of the orders of the High Court rejecting the tax case petitions under section 256(2) of the Act, we should, in the normal course, grant special leave, register the corresponding civil appeals and, after setting aside the orders of the High Court, remit the corresponding tax case petitions to the High Court with a direction to allow the petitions and to direct the income-tax Appellate Tribunal to state a case and refer a question of law for the opinion of the. High Court and thereafter to dispose of the references in the light of the pronouncement of this Court in the said Keshavji Ravji and Co.'s case (1990) 183 ITR 1. This procedure would, indeed, be an idle, time-consuming and wholly avoidable formality in the circumstances of the present cases. As the position is now settled, we are of the opinion that the interests of justice would be served by treating the present special leave petition as directed against and arising from the main appellate orders of the Income-tax Appellate Tribunal, Madras, and after granting special leave, set aside that part of the appellate orders as pertain to the extent of disallowance of the interest under section 40(b) of the Act and direct the Tribunal to dispose of the appeals on the point afresh in the fight of the aforesaid pronouncement of this Court..

These petitions are, therefore, treated as directed against the main appellate judgments dated Mrach 3, 1984, in LTA/ No.1521/Mds/1982; February 29, 1984, in I.TA. No.898/Mds/1982; August 30, 1983, in ITA No.1520/Mds/1982 and February 22, 1984, in I.T.A. No.1848/Mds/1983 of the Income-tax Appellate Tribunal, Madras, and special leave granted.

The orders of the Tribunal made under section 256(1) f the Act in each of these cases as well as the orders of the High Court in Tax Case Petitions Nos. 739 of 1985, 313 of 1985, 260 of 1984 and 42 of 1986 are set aside.

Further, the appellate orders of the Income-tax Appellate Tribunal, in so far as they pertain to the extent of disallowance of interest under section 40(b) of the Act, are set aside and the said appeals remitted to the Tribunal for fresh disposal of the appeals on the point in the light of the pronouncement in Keshavji Ravji and Co.'s case (1990) 183 ITR 1(SC).

There will, however, be no order as to costs.

M.BA./942/TOrder accordingly.