- In this references under section 66(1) of the Income-tax Act at the instance of the assessee, Sorabji Framji Kerawala, as an individual, the question we have been asked to answer is :

"Whether, in the facts and the circumstances of the case, the interest paid by the assessee on moneys borrowed from outsiders for making advances to the firms Nimar Cotton Press Factory and Nimar Ginning Factory in which he was a partner is allowable as a deduction while computing his individual income for the purposes of assessment ?"

The material facts are that the assessee is a partner in two unregistered firms, known as Nimar Cotton Press Factory and Nimar Ginning Factory, Khandwa. During the material assessment year, he borrowed money from some persons and paid interest on these borrowings for the purpose of the two firms amounting to Rs. 5,058. In his individual assessment the assessee claimed to deduct this amount of interest from his assessable income. The income-tax Officer had adopted the course under section 23(5)(b) of the Act of assessing the assessee Sorabji Kerawala as a partner in the unregistered firms in respect of his share of the firms profits instead of assessing the firms as units of assessment. The assessees claim was rejected by the Income-tax Officer on the ground that the payments of interest pertained to the business of the firms and not the business of the assessee. The Appellate Assistant Commissioner allowed the claim following the decision of the Appellate Tribunal in the assessment case relating to the assessment to income-tax for the preceding year. In that case the Appellate Tribunal, relying on Shantikumar Narottam Morarji v. Commissioner of Income-tax, had allowed the assessees claim for a similar deduction on account of interest paid by him on his borrowings for the purposes of the firms. It must be mentioned that in the assessment year 1952-53, the unregistered firms themselves had been assessed and the Income-tax Officer did not resort to section 23(5)(b).

The department then went up in appeal before the Tribunal. While that appeal was pending before the Tribunal, it was held by this court in Commissioner of Income-tax v. Sorabji Framji Kerawala that, where a partner of an unregistered firm which is assessed as a unit of assessment borrows from outsiders money for the use of the firm, the interest paid by him on such money is not allowable as a deduction under section 10(2)(iii) of the Act while computing his individual income for the purpose of assessment. This decision was given on a reference under section 66(1) arising out of the assessment proceedings against the assessee for the year 1952-53. The Tribunal took the view that this decision governed the question of the deduction on account of interest claimed by the assessee in the assessment year 1953-54 also. Accordingly, the appeal preferred by the department was allowed and the assessees claim for deduction was rejected by the Tribunal.

Thereafter, the assessee filed an application under section 35 of the Act asking the Tribunal to review its order allowing the departments appeal and rejecting the assessees claim for deduction. The assessee contended that as in the assessment year 1953-54 none of the two unregistered firms was regarded as the unit of assessment and assessed as such and the Income-tax Officer adopted the course under section 23(5)(b)., the decision in Commissioner of Income-tax v. Sorabji Framji Kerawala had no applicability; and that, on the other hand, certain observations made by this court in that case indicated that the assessee was entitled to the deduction he claimed. The Tribunal rejected this prayer observing that this difference between the assessment proceedings for the years 1952-53 and 1953-54 was not brought to their notice at the time of the hearing of the appeal. The assessee then made an application under section 66(1) for referring the case to this court.

The Tribunal was clearly in error in thinking that the deduction claimed by the assessee in the proceedings for the year 1953-54 must be disallowed in the same way as was done in Commissioner of Income-tax v. Sorabji Framji Kerawala. It failed to note that whereas in the assessment year considered in Commissioner of Income-tax v. Sorabji Framji Kerawala the unregistered firms had been assessed taking them as units of assessment, in the assessment year in the present case the Income-tax Officer assessed Sorabji Kerawala as a partner of those firms in respect of his share in the firms profits. The decision in Commissioner of Income-tax v. Sorabji Framji Kerawala related to a claim for deduction by a partner of an unregistered firm under section 10(2)(iii) of the Act, when the unregistered firm itself had been assessed as a unit of assessment. In that case, it was indicated that where the unregistered firm was not assessed like an individual, and the partner was assessed under section 23(5)(b). in respect of his share of the firms profits, then the partner was entitled to deduct the amount of interest on his borrowings for the purposes of the firm while computing his individual income for the purpose of assessment. This is on the principle that if it was necessary for the assessee to borrow and advance moneys to the firm in order to enable him to earn the income representing his share of the profits of the firm, then the deduction would be permissible on ordinary principles of commercial accounting as under section 10 it is the true profits and gains ascertained on ordinary principles of commercial accounting which are taxable. This view is fortified by the decision of the Bombay High Court in Shantikumar Narottam Morarji v. Commissioner of Income-tax. The Bombay High Court has held in that case that it would be open to the partner in a registered firm to claim a deduction against the share of the profits included in his total income if he satisfies the taxing authorities that such deduction represented the necessary expenditure incurred in order to enable him to earn the profits which are being subjected to tax. In our view, the position of a partner in an unregistered firm who is assessed with the aid of section 23(5)(b).

is no different in respect of such a claim for deduction.

Learned Advocate-General appearing for the department frankly conceded that the assessee would be entitled to get the deduction claimed by him as he was assessed under section 23(5)(b). in respect of his share of the firms profits. He, however, raised the objection that the question whether the deduction could be allowed as the assessee had been assessed under section 23(5)(b).

did not at all arise out of the order of the Tribunal and was being raised for the first time in this court and the reference made by the Tribunal was incompetent. Learned Advocate-General relied on the decision of the Supreme Court in Commissioner of Income-tax v. Scindia Steam Navigation Co. Ltd.

We are unable to accede to the contention of the learned Advocate-General that the question which we have been asked by the Tribunal to answer does not arise out of the order of the Tribunal. The decision of the Supreme Court cited by the learned Advocate-General itself shows the untenability of the contention. In the Supreme Court case, the assessee was Scindia Navigation Co. Ltd. In the last war one of its ships was lost as a result of enemy action and in 1944 Government paid a certain amount as compensation which exceeded the original cost of the ship. The Income-tax Officer included the difference between the original cost and the written down value of the ship in the total income of the assessee for the assessment year 1946-47. The charge was sought to be made under section 10(2)(vii) of the Income-tax Act. Before the taxing authorities, the assessee contended that the proviso to section 10(2)(vii) did not apply as according to a direction issued by the Board of Revenue for the purposes of the Excess Profits Tax Act, 1940, the amount received by the company as compensation should be deemed to have been received not in the year of account but in the year previous thereto This contention was rejected by the taxing authorities as well as by the Tribunal. When the matter came up before the Bombay High Court on a reference under section 66(1), the assessee raised the contention that the aforesaid proviso had no application to the case as the same had been introduced by an amendment which came into force on 4th May, 1946, whereas the liability of the company fell to be determined as on 1st April, 1946, when the Finance Act, 1946, came into force. The Bombay High Court overruled the departments objection that this question could not be raised as it did not arise out of the order of the Tribunal having been neither raised before it nor dealt with by it and further that it had not been referred to the court. It was observed by the learned judges of the Bombay High Court that the form in which the question was framed was sufficiently wide to take in the new contention; that if a point of law was implicit in the question raised by the Tribunal and if no additional facts were necessary to support that point, then it was open to the assessee to urge that point before the High Court notwithstanding that the point was not considered by the Tribunal. When the matter came up in appeal by the department before the Supreme Court, it was urged on behalf of the department that it was not open to the High Court to go into the question as to the applicability of the proviso to section 10(2)(vii) as it was neither raised before the Tribunal nor considered by it and could not, therefore, be said to be a question arising out of the order of the Tribunal which alone could be referred for the decision of the court under section 66(1).

After examining the provisions of section 66(1) and on a review of several authorities the Supreme Court summed up the position regarding the question of law arising out of an order of the Appellate Tribunal and the scope of sub-section (1) and (2) of section 66 thus :

"(1) When a question is raised before the Tribunal and is dealt with by it, it is clearly one arising out of its order.

(2) When a question of law is raised before the Tribunal but the Tribunal fails to deal with it, it must be deemed to have been dealt with by it, and is, therefore, one arising out of its order.

(3) When a question is not raised before the Tribunal but the Tribunal deals with it, that will also be a question arising out of its order.

(4) When a question of law is neither raised before the Tribunal nor considered by it, it will not be a question arising out of its order notwithstanding that it may arise on the findings given by it.

Stating the position compendiously, it is only a question that has been raised before or decided by the Tribunal that could be held to arise out of its order."

The Supreme Court then proceeded to consider whether the question which was raised before the Bombay High Court was one which arose out of the order of the Tribunal. It was pointed out that the only question on which the parties were at issue before the income-tax authorities was whether the sum of Rs. 9,26,532 representing the difference between the original cost and the written down value of the ship was assessable to tax as income received during the year of account and that that was the very question which was raised by the assessee in its application under section 66(1) and which was argued and decided by the High Court. The departments contention on this point was that while before the income-tax authorities the assessee company disputed its liability on the ground that the amount in question had been received in the year previous to the year of account, the contention urged by them before the High Court was that even on the footing that the income had been received in the year of account, the proviso to section 10(2)(vii) had no application, and that, therefore, it was a new question which the assessee was not entitled to raise. Rejecting this argument, the Supreme Court said :

"Section 66(1) speaks of a question of law that arises out of the order of the Tribunal. Now a question of law might be a simple one, having its impact at one point, or it may be a complex one, trenching over an area with approaches leading to different points therein. Such a question might involve more than one aspect, requiring to be tackled from different standpoints. All that section 66(1) requires is that the question of law which is referred to the court for decision and which the court is to decide must be the question which was in issue before the Tribunal. Where the question itself was under issue, there is no further limitation imposed by the section that the reference should be limited to those aspects of the question which had been argued before the Tribunal. It will be an over-refinement of the position to hold that each aspect of a question is itself a distinct question for the purpose of section 66(1) of the Act. That was the view taken by this court in Commissioner of Income-tax v. Ogale Glass Works Ltd. and in Zoraster and Co. v. Commissioner of Income-tax, and we agree with it. As the question on which the parties were at issue, which was referred to the court under section 66(1), and decided by it under section 66(5), is whether the sum of Rs. 9,26,532 is liable to be included in the taxable income of the respondents, the ground on which the respondents contested their liability before the High Court was one which was within the scope of the question, and the High Court rightly entertained it."

These observations make it very clear that if the consideration of a point of law was involved in a question raised by the Tribunal and it that point of the law was neither taken before the Tribunal nor considered by it, then the High Court is not precluded from considering the point of law in the question which was in issue before the Tribunal and referred to the High Court for decision under section 66(1).

Here, before the Tribunal the question that was in issue between the assessee and the department was whether the interest paid by the assessee on moneys borrowed from outsiders for making advances to the unregistered firms in which he was a partner could be allowed as a deduction in the computation of his individual income for the purpose of assessment. In disallowing the claim on the basis of this courts decision in Commissioner of Income-tax v. Sorabji Framji Kerawala the Tribunal failed to notice the material distinguishable circumstances in the present case that the Income-tax Officer had resorted to section 23(5)(b). for the assessment of the profits of the assessee as a partner in the unregistered firms and that the firms had not been assessed as units of assessment. The point of law, namely, whether when the Income-tax Officer had assessed the assessee with the aid of section 23(5)(b).

the deduction claimed could be allowed was necessarily involved in the question raised and decided by the Tribunal as to whether the deduction claimed by the assessee could or could not be allowed. Even if the Tribunal overlooked the distinction between Commissioner of Income-tax v. Sorabji Framji Kerawala and this case and overlooked the point of law and the assessee also did not appear before the Tribunal at the time of the hearing of the appeal, the point of law raised before us does not become question not arising out of the order of the Tribunal as the question whether the assessee was entitled to claim the deduction was raised before the Tribunal and decided by it. As that is the question which has been referred to us for decision, the legal ground on which the assessee claims the deduction is one which is within the scope of the question. The new contention does not involve any fresh investigation of a facts or reframing of the issues. Learned Advocate-General suggested that the fact that the Income-tax Officer assessed Sorabji Kerawala with the aid of section 23(5)(b).

in respect of his share of profits in the unregistered firms was a new fact of which this court could not take any notice when it had not been found by the Tribunal. We do not agree. The facts which the Tribunal is required to determine and which when embodied in the statement of the case form the basis on which the High Court is required to decide a reference under section 66(1) are obviously those which relate to the assessees business, profession or vocation, his income, and his liability to tax etc. They clearly do not include the fact of the provision of law under which the Income-tax Officer sought to make the assessee liable for payment of tax. In our judgment it is open to us to consider the contention raised before us by the assessee and answer the question referred to us for decision by the Tribunal.

For these reasons, our answer to the question referred is in the affirmative. The assessee shall have costs of this reference. Counsels fee is fixed at Rs. 100.

Question answered in the affirmative.