1990 (2) TMI 2 - SC - Income Tax

Interest paid to partner was disallowed while computing disallowance u/s 40(b) - application against that decision was also rejected on the ground that it concurred with the HC decision - SC overruling that HC decision - held that special leave petition against refusal to call the reference can be converted to one against decision of the Tribunal on merits

Summary

Issues:
- Interpretation of section 40(b) of the Income-tax Act, 1961 regarding the disallowance of interest paid by a firm to its partner.
- Rejection of assessee applications under section 256(2) of the Income-tax Act, 1961 by the High Court of Judicature at Madras.
- Examination of the correctness of the decision in CIT v. O. M. S. S. Sankaralinga Nadar and Co. [1984] 147 ITR 332 by the Supreme Court in Keshavji Ravji and Co. v. CIT.
- Grant of special leave and remittal of the tax case petitions to the High Court for fresh disposal based on the pronouncement in Keshavji Ravji and Co.'s case [1990] 183 ITR 1.

Analysis:
The judgment pertains to four petitions seeking special leave arising from the High Court of Judicature at Madras' orders regarding the disallowance of interest paid by a firm to its partner under section 40(b) of the Income-tax Act, 1961. The Income-tax Appellate Tribunal had initially disallowed the entirety of the interest paid by the firm to the partner without considering any interest paid by the partner to the firm. The Tribunal's decision was appealed by the Revenue, leading to a reversal of the initial view in favor of the assessees. The assessees then filed tax case petitions under section 256(2) before the High Court, which rejected the applications citing a previous judgment of the Madras High Court in CIT v. O. M. S. S. Sankaralinga Nadar and Co. [1984] 147 ITR 332.

The Supreme Court, in its judgment, examined the correctness of the Madras High Court's decision in Sankaralinga Nadar's case in Keshavji Ravji and Co.'s case [1990] 183 ITR 1 and concluded that the former did not lay down the law correctly in all respects. The Supreme Court's pronouncement in Keshavji Ravji and Co.'s case covered the issues raised in the special leave petitions. Therefore, the Court decided to treat the special leave petitions as directed against the main appellate orders of the Income-tax Appellate Tribunal, Madras, and set aside the part of the orders related to the disallowance of interest under section 40(b) of the Act. The Court directed the Tribunal to reconsider the appeals in light of its pronouncement in Keshavji Ravji and Co.'s case.

Consequently, the Supreme Court granted special leave, set aside the orders of the Tribunal and the High Court in the tax case petitions, and remitted the appeals to the Tribunal for fresh disposal based on the principles established in Keshavji Ravji and Co.'s case. The judgment emphasized the settled position and the interests of justice in ensuring a fair and efficient resolution of the issues. The Court made no order as to costs in this matter.