Madras H.C : Whether, on the facts and in the circumstances of the case, the amounts of Rs. 14,763, Rs. 15,228 and Rs. 16,428 were chargeable to income-tax and the amounts of Rs. 10,246, Rs. 7,600 and Rs. 2,638 were proper deductions for the asst. yrs. 1970-71, 1971-72 and 1972-73, respectively ?

Counsel Appeared

P.P.S. Janardhana Raja, for the Assessee : C.V. Rajan, for the Revenue

RATNAM, J :

In these references under s. 256(1) of the IT Act, 1961, at the instance of the assessee, the following common question of law has been referred the opinion of this Court for the asst. yrs. 1970-71 to 1972-73 :

Whether, on the facts and in the circumstances of the case, the amounts of Rs. 14,763, Rs. 15,228 and Rs. 16,428 were chargeable to income-tax and the amounts of Rs. 10,246, Rs. 7,600 and Rs. 2,638 were proper deductions for the asst. yrs. 1970-71, 1971-72 and 1972-73, respectively ?

The assessee is a registered firm dealing in cloth and has been maintaining its accounts on the mercantile basis. There was another firm, M. R. Govindasami Chettiar and Sons, in which one G. Padmanabha Chettiar was a partner, representing the joint family, of which he was the Karta. That firm was dissolved on April 13, 1969, and its assets and liabilities were taken over by G. Padmanabha Chettiar who agreed to pay off the other partners as well. Of the amounts so payable was a liability to a partner, Ragothama Chettiar. On April 13, 1969, there was a partition in the family of G. Padmanabha Chettiar which consisted of himself and his four sons and Padmanabha Chettiar and his four divided sons constituted the assessee-firm and took over the business from Padmanabha Chettiar who had earlier taken it over from M. R. Govindasami Chettiar and Sons. Apparently, the assets and liabilities were brought into the new firm as part of the capital of the partners. Part of the debts taken over from the erstwhile firm consisted of a sum of Rs. 1,36,900, due to the assessee- firm, from seven parties and the assessee- firm owed monies to two persons, viz., G. Venkatesa Chettiar and G. Ragothama Chettiar. On the amounts due to the firm, no interest was taken credit for by the assessee, though these advances were represented by promissory notes and interest accrued thereon from day to day. On the outstandings due to G. Venkatesa Chettiar and G. Ragothama Chettiar, the assessee had to pay interest and on accrual basis, amounts of Rs. 10,246, Rs. 7,600 and Rs. 2,638 were claimed against the income to be computed. The ITO took the view that the assessee had been underassessed for the assessment years in question and reopened the assessments and while reassessing the assessee, the ITO disallowed the interest claimed by way of deduction of Rs. 10,246, Rs. 7,600 and Rs. 2,638, respectively, and he also estimated interest on accrual basis of Rs. 16,428 on the outstanding of Rs. 1,36,900 in respect of each of the assessment years and added this to the income. In the reassessment, a higher amount of interest had been charged keeping in view the enhanced income and for the asst. yr. 1970- 71, the amount charged came to Rs. 16,428. In the appeals preferred by the assessee before the AAC, an objection was raised to the reopening of the assessment and inclusion of the amount of Rs. 16,428 by way of interest for each of the assessment years as well as the disallowance of interest claimed as deduction. The AAC dismissed all the appeals. On further appeal before the Tribunal, it took the view that when the assessee-firm had taken over the assets and liabilities of the erstwhile firm as part of the capital of the partner or partners, the debtors and the creditors of the erstwhile firm constituted debtors and creditors of the assessee-firm, and interest payable to the creditors and receivable from the debtors constituted expenditure and income of the assessee-firm in its business to be computed on the same basis as the other receipts and expenditure of the cloth business, and in that view, the action of the authorities below in including in the income of the assessee interest on accrual basis was upheld as there was no dispute about the quantum. In so far as the interest payable to Venkatesa Chettiar and Ragothama Chettiar was concerned, the Tribunal took the view that those amounts were as much a part of the capital account brought into account as sundry creditors though in the shape of assets and liabilities and such creditors could not be dealt with differently and the assessee was justified in crediting interest to those creditors on the amounts owing to them and still remaining in the books of the business and deleted the addition of Rs. 10,246, Rs. 7,600 and Rs. 2,638, respectively, for the assessment years in question. That is how, the question, as referred to earlier, has come up before this Court for its opinion.

2. Learned counsel for the assessee contended that the Tribunal was in error when it purported to refer the second half of the question in a reference application filed by the assessee when there was no attempt by the Revenue to have that part of the question referred by means of an application under s. 256(1) of the Act. Reliance in this connection was placed upon the decision in CIT vs. V. Damodaran (1979) 13 CTR (SC) 191:(1980) 121 ITR 572 (SC). It is seen that in the reference application filed by the assessee, it sought such a reference only in relation to the addition of Rs. 14,763, Rs. 15,228 and Rs. 16,428 and not to any other. It is now not in dispute that the Revenue did not seek any reference with reference to the deletion of Rs. 10,24C, Rs. 7,600 and Rs. 2,638. The only justification for the Tribunal to refer the latter part of the question actually referred, as could be gathered from para 5 of the statement of the case, is that the question of law would otherwise be incomplete, as the basis of the decision of the Tribunal is the same with reference to both aspects of the assessee’s accounts. The Tribunal has also noticed the objection raised by counsel for the assessee in relation to the latter part of the reference, and despite such objection, the Tribunal has referred the latter part of the question. Earlier, it has been seen that the assessee never sought a reference on the point on the deletion of the amounts with reference to which it succeeded before the Tribunal. The Revenue also did not seek a reference. It was only in the course of referring the case on the application of the assessee under s. 256(1) of the Act with reference to the first part of the question referred that the Tribunal had also referred the second half of the question which was not the subject-matter of any reference application at all by the assessee or even by the Revenue. That was the reason why objection was also raised by the assessee even before the Tribunal, though the Tribunal did not accept the same. It is in this connection that the decision in CIT vs. V. Damodaran (supra), is relevant. It was pointed out by the Supreme Court that the Tribunal may decide an appeal partly against one party and partly against the other, and in the former case, one party may be aggrieved by the grant of relief, even though partially, and the other may be aggrieved by the refusal to grant total relief and in either case, the party who is aggrieved and who seeks a reference must file a reference application for that purpose and it is not open to him to make the reference application filed by the other party, the basis of his claim that a question of law sought by him should be referred. The Supreme Court also pointed out that in the second class of cases, where the order made by the Tribunal operates entirely in favour of one party, although in the course of making such an order, the Tribunal may have negatived some points of law, in which case, not being a party aggrieved by the result of the appeal, it is not open to the party to file a reference application, but if a reference application is filed by the aggrieved party, the non- applicant, in the event of the Tribunal agreeing to refer the case to the High Court, can ask for a reference of those questions of law also which arise on those submissions negatived by the Tribunal in appeal. This, it has further been pointed out, amounts to a recognition of the right in the winning party to support the order of the Tribunal also on grounds raised before the Tribunal, but negatived by it. In view of the clear and categorical pronouncement of the Supreme Court regarding the scope of the reference procedure under s. 256(1) of the Act, the Tribunal was in error in referring the latter part of the question for the opinion of this Court.

In so far as the first part of the question referred is concerned, we are of the view that the same basis has to be adopted for receipt and payment of interest and having regard to the mercantile system of accounting adopted by the assessee during the relevant years in question, the assessee cannot be permitted to adopt mercantile basis for the payment of interest by it and claim the benefit of the cash system in respect of the interest receivable by it. We, therefore, hold that the Tribunal was quite right in the view it took that the amounts of Rs. 14,763, Rs. 15,228 and Rs. 16,428 were chargeable to income-tax. We, therefore, answer the first part of the question referred to us in the affirmative and against the assessee. The second part of the reference is returned unanswered as that part of the question could not have been referred at all for the opinion of this Court. There will be no order as to costs.

[Citation : 182 ITR 1]