1966 (3) TMI 89 - HC - Income Tax

Summary

Issues Involved:
1. Whether the interest paid by the association of persons to one of its members was an allowable deduction under section 10(2)(iii) of the Indian Income-tax Act, 1922.
2. Whether the Appellate Tribunal had the power and jurisdiction to restore the assessee's appeal dismissed for default of appearance under rule 24.

Detailed Analysis:

Issue 1: Allowability of Interest Deduction
The first issue was whether the interest paid by an association of persons (AOP) to one of its members could be deducted under section 10(2)(iii) of the Indian Income-tax Act, 1922. Initially, the Income-tax Officer disallowed the interest paid to a partner of the firm, as per section 10(4)(b). However, the status of the assessee was later reassessed as an AOP, not a firm. The court held that the proviso to section 10(2)(iii) does not apply to an AOP, which is distinct from its individual members. Therefore, a member who advances money to the AOP is considered a creditor, and the interest paid to him is a legitimate business expense allowable under section 10(2)(iii).

Issue 2: Power to Restore Dismissed Appeal
The second issue was whether the Tribunal had the jurisdiction to restore an appeal dismissed for default under rule 24. The Tribunal initially dismissed the appeal for non-appearance but later restored it, considering there was sufficient cause for the absence. The Tribunal rectified the dismissal order under section 35(2) of the Act. The court examined whether such rectification was permissible. It was established that the power to rectify a mistake under section 35 is limited to correcting mistakes apparent from the record. The court cited precedents, including Maharana Mills and Asok Textiles, to emphasize that a mistake must be discoverable from the record itself and not from extraneous evidence.

However, the court also considered whether rule 24, which allowed dismissal for default, was ultra vires. The Full Bench of the Madras High Court in Chenniappa Mudaliar v. Commissioner of Income-tax held that rule 24 was ultra vires as it conflicted with section 33(4) of the Act, which mandates the Tribunal to decide appeals on merits. The court agreed with this view, stating that the Tribunal had no power to dismiss an appeal for default, and such an order was incompetent and could be rectified under section 35.

Conclusion:
The court answered the first question affirmatively, allowing the interest deduction for the AOP. For the second question, the court concluded that although there was no power to restore an appeal dismissed under rule 24, the dismissal itself was incompetent and could be rectified under section 35. The parties were directed to bear their own costs.