1996 (1) TMI 98 - HC - Income Tax

High Court orders Tribunal to refer legal questions on interest disallowance, addresses conflicting decisions.

The High Court directed the Tribunal to refer legal questions regarding the disallowance of interest on partners' debit balances and the Tribunal's ... Business Expenditure, Interest On Borrowed Capital Issues:1. Jurisdiction of the Tribunal to disallow interest on debit balances of partners2. Conflict between Tribunal's decision and High Court's decision on interest disallowanceAnalysis:The judgment involves the applicant-assessee seeking direction under section 256(2) of the Income-tax Act, 1961, to refer common legal questions to the High Court. The issues revolve around the Tribunal's decision on disallowing interest on debit balances of partners and the conflict with the High Court's decision. The applicant, a partnership firm, was assessed for various years with disputes on interest disallowance. The Income-tax Officer disallowed part of the interest paid to creditors due to overdrawings in partners' accounts. Appeals were filed, and the appellate authority accepted the applicant's contention based on a previous decision. However, the Tribunal, in a subsequent order, differed from the earlier decision and partly allowed appeals for certain years. The Department filed rectification applications, which were allowed, leading to the applicant filing reference applications seeking clarification on the disallowed interest and the Tribunal's departure from the High Court's decision.The applicant argued that the Tribunal erred in disallowing interest on debit balances and not following the High Court's decision. The applicant emphasized the importance of the legal principles laid down by the High Court and questioned the Tribunal's reasoning for departing from precedent. On the other hand, the Department contended that the Tribunal's decisions were based on factual considerations and not legal questions. The High Court found it necessary to determine if the Tribunal's view conflicted with the High Court's decision and the legality of disallowing interest on debit balances.After reviewing the Tribunal's orders and submissions, the High Court identified two key legal questions for reference. The Court directed the Tribunal to state the cases for all assessment years and referred the questions of law for the Court's opinion. The questions pertained to the justification of disallowing interest on debit balances of partners and the Tribunal's decision to follow its own order over the High Court's precedent. The reference applications were allowed, with no order on costs, and counsel fees were fixed. The order was to be forwarded to the Tribunal for compliance within a specified timeframe. The judgment was retained in the specific case and copies were placed in related cases for easy reference.