JOYANARAYAN KEDARNATH Vs. COMMISSIONER OF INCOME TAX

JUDGEMENT

(1.) UPON directions issued by this court on an application under section 256(2) of the Income-tax Act of 1961 (hereinafter referred to as " the Act "), made by the assessee, the Income tax Appellate Tribunal, Cuttack Bench, has stated a case and referred the following question for the opinion of the court:

(2.) THE assessee is a registered firm and the relevant year of assessment is 1970-71. During the assessment year 1969-70, the firm had comprised of five partners, namely, Kedarnath, Rameshlal, Dineshlal, Maheshlal and Sureshlal. THE first four partners made gifts of varying amounts to their respective wives on October 19, 1968, appertaining to the assessment year 1969-70 and the alleged gifts were made by book transfers and the respective capital accounts of the partners were debited and consequent credit entries were found in the names of the ladies. Interest was paid to the ladies on the loans. In the assessment year 1970-71, the firm claimed deduction of interest to the tune of Rs. 39,000 said to have been paid to the ladies on their loans. On August 26, 1970, the firm's assessment for the year under dispute was completed under section 143(3) of the Act and the claim of deduction of interest was allowed in full. THE ITO, thereafter, purporting to act under section 64(iii) of the Act, included the interest credited to the ladies in the incomes of their respective husbands. When assessment for the year 1971-72 was taken up, the ITO came to hold that the gifts were not genuine. He, therefore, 'disallowed the claim of interest and directed assessment for the previous year (1970-71) to be reopened. He reassessed the interest paid by the firm to the donees by adding the same to the firm's income as required under section 40(b) of the Act. THE ITO directed initiation of a proceeding under section 271(1)(c) of the Act for the assessment year and the IAC ultimately levied a penalty of Rs. 39,000.