COMMISSIONER OF INCOME TAX Vs. ALOK PAPER INDUSTRIES

JUDGEMENT

(1.) THIS is a reference under Section 256(1) of the I.T. Act, 1961 (hereinafter referred to as "the Act"), referring the following question of law :

(2.) THE assessment year in question is 1976-77. THE assessee-firm has been carrying on the business of manufacture and sale of paper. It had been maintaining accounts under the mercantile system of accounting and the accounts are closed on 31st December, every year. THE assessee-firm had credited interest on the credit balance of all the partners excepting for Shri Chandmal Agarwal who had a debit balance in his capital account. No interest had been charged on the said debit balance by the assessee. THE assessee had paid interest on borrowings to outsiders. THE ITO, therefore, inferred that borrowings to the extent of the debit balance in the partner's account had not been utilised for business purposes and thus disallowed the proportionate interest. THE assessee had claimed deduction on account of interest to the extent of Rs. 13,020, which was disallowed on the aforesaid reasoning of the ITO. THE AAC upheld this finding of the ITO and, according to him, there was no explanation for not charging interest on the debit balance of the partners. THE Tribunal, however, allowed the assessee's appeal and the disallowance was deleted.

(3.) ON the particular facts and in the circumstances of the case, the Tribunal was right in law in holding that the amount of Rs. 13,020 was not disallowable from and out of the assessee' claim for interest payment in respect of its borrowals.