COMMISSIONER OF INCOME TAX Vs. GARG ENGINEERING CO

JUDGEMENT

(1.) THIS is an application under S. 256(2) of the IT Act, 1961 filed at the instance of the CIT, Lucknow. The applicant has submitted that two questions set out in this application are questions of law arising out of the order of the Tribunal and, therefore, a direction be issued to the Tribunal to refer those questions for the opinion of this Court. The questions are as under :

(2.) WE have heard learned Standing Counsel for the IT Department in support of this application, and are of the opinion that the order of the Tribunal is concluded by findings of fact and does not give rise to any question of law. The Tribunal has in categorical terms held that ingredients of S. 271(1)(c) of the IT Act, 1961 (for short "the Act") are not satisfied in this case. It appears that the assessee had claimed a deduction of Rs. 63,993 in the computation of its total income for the asst. year 1982 83 as an amount of interest paid to M/s Garg Financiers. The deduction claimed was not allowed and the amount of Rs. 63,993 was added back to the income of the assessee. It may be observed that the assessee is a partnership firm and the addition of the aforesaid amount was upheld in appeal on the quantum side. While completing the assessment proceedings, the ITO simultaneously initiated proceedings under S. 271(1)(c) of the Act for the imposition of penalty on the ground that the assessee had concealed its income or had furnished inaccurate particulars of such income. The ITO was of the view that there was apparently a close relation between the partners of the assessee firm and M/s Garg Financiers from whom the funds were taken allegedly as interest bearing loan @ 17 per cent per annum. The case of the Revenue was that, in fact, the partners of the assessee firm withdraw money from their respective capital accounts with the assessee firm and deposited/transferred the same to the loaner firm (Garg Financiers) which in turn, invested those amounts with the assessee. In short, the amount of Rs. 63,993 claimed as interest, according to the Revenue, was not a permissible deduction in view of S. 40(b) of the Act, being the amount of interest paid to a partner of a firm. On this finding the assessee was eventually subjected to a penalty of Rs. 38,100 by the ITO under S. 271(1) (c) of the Act after obtaining the approval of the concerned IAC. The imposition of penalty was confirmed in appeal by the CIT(A). However, when the matter came to be considered by the Tribunal in second appeal, the Tribunal did not agree with the IT authorities and cancelled the penalty order. It held :