COMMISSIONER OF INCOME TAX Vs. RAJ KUMAR SINGH

JUDGEMENT

(1.) THE Tribunal, Allahabad has referred the following five questions of law under Section 256(1) of the IT Act, 1961 (hereinafter referred to as 'the Act') for opinion to this Court:

(2.) THE reference relates to the asst. yr. 1990 -91. Briefly stated, the facts giving rise to the present reference are as follows: The assessee is a partnership firm and is a sub -contractor of the firm M/s Jaiprakash Associates (for short 'JPA') and has also certain dumpers and tippers etc., which it gives on hire to the contractors on daily basis. This firm has been running its business for the last several years. It had 91,970 shares, each valuing Rs. 100, in JPA in the asst. yr. 1986 -87. On 31st Dec, 1985, JPA issued bonus shares in the ratio of 1 : 1 and, thus, the accumulation of the shares with the assessee firm amounted to 1,83,940. Investment in the original shares in the firm was Rs. 91,97,000. Thereafter, JPA was merged into J.P. Rewa Cement Public Ltd. Company (for short 'JPR'). By the order of this Court, as per terms of agreement, 1 share of JPA was allotted 75 shares of JPR. In this way the total shares with the firm, on the basis of its holding of shares of JPA, amounted to Rs. 3,97,55,000 in JPR. These shares of JPR were of face value of Rs. 10 each. The firm showed its real value amounting to Rs. 13,97,55,000 in the accounts of the firm and after deducting initial investment of Rs. 91,97,000 from the said value, credited the balance amount of Rs. 12,87,58,000 in the respective shares of the partners in proportion to their shares and the abovesaid value was also adjusted in the accounts and the balance sheet of the firm. During the year, the partners withdrew Rs. 2,27,08,772 in total from the respective accounts. The assessee firm had also paid Rs. 1,58,01,118 as interest during the year to its depositors/creditors. The AO disallowed the said interest on the ground that the drawings by the partners were in excess of the deposits and thus, the interest paid on the borrowings was not for business purposes. In appeal, the learned CIT(A) also confirmed the said disallowance on the abovesaid plea and also on an additional ground that the interest paid to certain depositors/creditors who were directly related or friends of the partners of the assessee firm was also in excess of the reasonable interest. The CIT(A) held that the reasonable interest was of 20 per cent which is charged by the bank and, thus interest paid @ 24 per cent and 25 per cent to some of the creditors being in excess of that 20 per cent was also a point for the alleged disallowance. The assessee, being aggrieved, had come up in second appeal before the Tribunal. The Tribunal after hearing the parties at length on the point, decided the issue in paras 11 and 12 of its order, which runs as under:

(3.) THE assessee had incurred an expenditure of Rs. 28,11,678 towards repairs and purchase of spares on its machinery. The said amount was disallowed on the ground that the receipts were too low and secondly the amount of repairs shown was too high in comparison to earlier year. The said disallowance was also confirmed by the CIT(A). The assessee appealed to the Tribunal. The Tribunal gave its finding in para 33 deleting the said disallowance, as under: