MILLS STORE CO Vs. COMMISSIONER OF INCOME TAX

JUDGEMENT

(1.) THIS is a reference under S. 66(1) of the Indian IT Act, 1922. M/s Mills Store Company, a partnership firm constituted of six partners, was carrying on business at Karachi with branches, amongst other places, at Bombay. As at the end of March, 1948, that partnership was dissolved and its accounts were made up. As from 1st April, 1948, three of the six partners took over the Karachi business and continued it in the same name. This new Karachi firm will be referred to as "the Karachi firm". As from 1st April, 1948, the three remaining partners took over the Bombay business and continued it in the same old name in partnership with two new partners. This firm will be referred to as "the assessee -firm".

(2.) AFTER these two new firms were formed there were numerous transactions between them. The Tribunal has found that in the accounting year 1948 -49 ending on 31st March, 1949, the assessment year being 1949 -50, an amount of Rs. 3,94,823 was debited to the account of the Karachi firm and a corresponding credit was given to certain parties who were creditors of the Karachi firm for an equivalent amount and that the amount in fact represented loans taken by the Karachi firm from a number of creditors who had later on migrated to India as a result of the partition of India. In its books of account the assessee -firm credited that amount to these creditors, hereinafter referred to as "the said creditors", and debited the same in the account of the Karachi firm maintained by it in its books of accounts. It has also been found that in the Karachi firm's account for the same accounting year 1948 -49, the Karachi firm remitted to the assessee - firm diverse sums aggregating to Rs. 5,98,300. In the asst. year 1949 -50, relating to the accounting year 1948 -49, the assessee -firm credited in the account of the said creditors maintained by it in its books of accounts interest on the amounts due to them by the assessee -firm and simultaneously charged and debited to the Karachi firm interest payable by it to the assessee -firm. The assessee - firm was assessed in the asst. year 1949 -50, on the basis of interest debited to the Karachi firm being included in its taxable income and interest payable by it to the said creditors being deducted from its income under the provisions of S. 10(2)(iii). In the asst. year 1950 -51 relating to the accounting year 1949 -50, although in the books of accounts of the assessee -firm no interest was charged in the account of the Karachi firm, interest payable by the Karachi firm was estimated and included in its income and interest payable by the assessee - firm to its said creditors and credited in the account of the said creditors was allowed as a deduction. In the accounting year 1950 -51, the assessment year being 1951 - 52, the assessee -firm wrote off as a bad debt its outstanding claim against the Karachi firm and simultaneously debited a like amount to the capital account of its partners maintained by it in its books of account. The assessee -firm claimed the bad debt so written off as a revenue loss. In its books of accounts the assessee -firm had, in this year also, credited to the said creditors interest on the amounts due to them by the assessee - firm and claimed it as a deduction from its taxable income. The ITO disallowed the claim for the bad debt so written off as a revenue loss and completed the assessment by allowing the interest credited to the said creditors as a deduction. In respect of the asst. year 1952 -53, the accounting year being 1951 -52, the assessee -firm claimed and was allowed interest credited to the said creditors as a deduction from its taxable income. The assessments for the two asst. yrs. 1951 -52 and 1952 -53 were reopened under S. 34 on the ground that certain income had escaped assessment on the ground that in the asst. year 1951 -52 depreciation had been wrongly allowed in respect of a building at Saharanpur and in the asst. yr. 1952 -53, depreciation had been wrongly allowed in respect of the said building and also in respect of a motor car. In the reassessment proceedings for both these years the ITO not only disallowed the said depreciation which was done with the consent of the assessee -firm, but overruling the assessee - firm's objection, also disallowed the deduction for interest credited by the assessee -firm to the said creditors for the amounts due by it to them. In respect of each of the six asst. yrs. 1953 -54 to 1958 -59, the assessee -firm claimed interest paid by it to the said creditors as a deduction, but that claim was disallowed in respect of each of these six years.

(3.) THE Tribunal has, thereafter, referred the undermentioned questions of law to this Court under s. 66(1). The questions are :