COMMISSIONER OF INCOME TAX Vs. SRIDEV ENTERPRISES

JUDGEMENT

(1.) THE question referred to us, as called for by this court, under section 256(2) of the Income-tax Act, 1961, reads thus :

(2.) THE relevant accounting year of the assessee-firm ended on March 31, 1978. During this accounting year, the assessee had advanced certain sums to Nalanda Enterprises, Bangalore ("Nalanda", for short); the balance outstanding from Nalanda was Rs. 2,55,750 as on March 31, 1978; no interest was charged against this advance. THE assessee had borrowed from third parties and had been paying interest thereon; this interest was claimed as a deduction out of the assessee's income. Some of the partners of the assessee and Nalanda were common and they had business links interse; in these circumstances, the assessing authority disallowed the deduction claimed by the assessee to the extent of interest-free advances standing in the name of Nalanda on the ground that the amounts borrowed by the assessee were not utilised by the assessee for its own business but were diverted as advance to Nalanda free of interest. However, to the extent of advance shown as existing against Nalanda on the first day of the accounting year, which was the net balance of advances made during the previous accounting year, the same was excluded for the purpose of computing disallowance of deduction. As on April 1, 1977 (the first day of the accounting year ending on March 31, 1978), the advance shown against Nalanda was Rs. 65,478; the advances during this accounting year were found to be Rs. 1,90,272. THErefore, interest at 18% on this sum of Rs. 1,90,272 claimed as a deduction by the assessee was disallowed. THE Commissioner of Income-tax (Appeals) dismissed the assessee's appeal. He held :

(3.) THE Revenue is aggrieved by the limited question remanded; according to the Revenue, the remand should comprise the question pertaining to the opening balance advanced to Nalanda because the said sum was also advanced out of borrowed amounts.