ALOK PAPER INDUSTRIES Vs. COMMISSIONER OF INCOME TAX

JUDGEMENT

(1.) BY this reference under Section 256(1) of the I.T. Act, 1961, hereinafter referred to as " the Act", the I.T. Appellate Tribunal, Indore Bench, has referred the following question of law to this court for its "opinion:

(2.) THE material facts giving rise to this reference, briefly, are as follows : THE assessee is a firm carrying on business of a manufacture and sale of paper. While framing the assessment for the assessment year 1974-75, the ITO allowed a deduction of a sum of Rs. 1,24,217 paid by the assessee as interest. Certain other deductions claimed by the assessee were, however, not allowed by the ITO, and, hence, an appeal was preferred by the assessee before the AAC, which was partly allowed. A further appeal preferred by the assessee was partly allowed by the Tribunal. On scrutiny of the assessment record of the assessee for the assessment year 1974-75, the Commissioner noticed that during the accounting year, relevant to the assessment year 1974-75, one of the partners of the assessee-firm had overdrawn sums from out of the borrowed funds on which interest had been paid and that a part of the borrowed fund had thus been utilised for purposes other than that of business. THE Commissioner was, therefore, of the opinion that in allowing deduction of the entire amount of Rs. 1,24,217 claimed to have been paid by the assessee by way of interest, the assessment order passed by the ITO appeared to be erroneous in so far as it was prejudicial to the interest of the Revenue. A notice under Section 263 of the Act was, accordingly, issued to the assessee to show cause. THE assessee pointed out to the Commissioner that the order of the ITO was the subject-matter of appeals before the AAC and the Tribunal, and, hence, the order of the ITO had merged in the order of the appellate authorities as a result of which the Commissioner had no power to revise the order of the ITO under s, 263 of the Act. This contention was not upheld by the Commissioner on the ground that the question of deduction allowable to the assessee by way of interest was not the subject-matter for consideration before the AAC or the Tribunal. THE Commissioner, accordingly, set aside the order passed by the ITO to the extent indicated in the order dated January 18, 1977, passed by the Commissioner. Aggrieved by the order passed by the Commissioner, the assessee preferred an appeal before the Tribunal. THE Tribunal held that the order of the ITO, in respect of allowance of interest on the over-drawings by a partner of the assessee-firm, did not merge in the orders of the AAC and the Tribunal, as, that matter was never the subject-matter of appeal before the AAC and the Tribunal. Aggrieved by the order passed by the Tribunal, the assessee submitted an application for making a reference to this court and that is how, at the instance of the assessee, the aforesaid question of law has been referred to this court for its opinion.

(3.) THE real question for consideration in the case is whether the Tribunal was justified in holding that the order passed by the ITO in respect of the allowance of interest did not merge in the order passed by the AAC. THE question framed by the Tribunal does not, in our opinion, bring out the real issue which arose before the Tribunal for consideration and we have therefore, reframed the question as follows :