1. The applicant originally instituted one reference application under section 256(2) of the Income-tax Act, 1961, in relation to the assessment years 1968-69, 1969-70 and 1970-71. In these three years, there were three appeals by the assessed before the Income-tax Appellate Tribunal and also three appeals by the Department, which were all decided by one order dated April 29, 1975. The departmental appeals were dismissed and the assessed's appeals were allowed in part. Thereafter, the assessed filed three applications under section 256(1) of the Income-tax Act, 1961, for these assessment years and all these applications were decided by one composite order dated June 8, 1978. The assessed filed only one reference application. There were some office objections which led to the return of the case; after rectification of the same, the case came before a Bench of this court on January 16, 1980, for admission purposes. The Bench passed an order stating that separate income-tax cases had to be filed for each year and the counsel for the petitioner undertook to file such applications. Two weeks' time was granted by an order for doing this. After the additional applications had been filed along with petitions for condensation of delay, notice was given to the Department.
2. The first question we have to consider is whether the delay has to be condoned for the two belated applications. Reference was made to the decision in Nawal Behari Lal Goel v. CIT : 140ITR979(Delhi) , where in similar circumstances the delay was not condoned. And learned counsel for the Department contends that we should dismiss the belated applications on the ground of delay and deal only with the case that is within time.
3. In that case, we not only dealt with the question of the necessity to file separate applications for separate years under section 256(2), but also found that the applications had to be rejected on merits and, accordingly, the applications were dismissed on merits and the delay was also not condoned.
4. Although, there can be no doubt about the correctness of the view that three applications have to be filed for three years, we have also to deal with the question whether delay can be condoned under section 5 of the Limitation Act. By virtue of the provisions of the Limitation Act, even in the case of special Acts which provide a period of limitation different from that set out in the schedule, the various provisions of the Limitation Act have been made applicable. The relevant provision is section 29(2). The next question for consideration is whether there are any grounds for condoning the delay in this case.
5. In this connection, it has been brought to our notice that only one order was passed covering all the six appeals for the three assessment years in question and no separate order was passed such as is normal in the ordinary civil courts. The normal practice in the civil courts is to have one composite order along with short separate orders, but it appears that the Tribunal merely passes one single order. When the reference applications were filed under section 256(1), they were also dicided by one composite order.
6. The contention, on behalf of the learned counsel for the assessed, is that there can be a bona fide error by counsel as to whether one applications under section 256(2) is to be filed or, whether three application have to be filed. As noted in the earlier judgment, it is the settled practice that for each assessment year a separate application has to be filed and the assessed in this case also filed three applications under section 256(1). However, an examination of section 256(1) shows that it is possible to make a bona fide error of this type. For this purpose, section 256(1) of the Act can be reproduced here. It is as follows :
'256. (1) The assessed or the Commissioner may, within sixty days of the date upon which he is served with notice of an order under section 254, by application in the prescribed form, accompanied where the application is made by the assessed by a fee of two hundred rupees require the Appellate Tribunal to refer to the High Court any question of law arising out of such order and, subject to the other provisions contained in this section, the Appellate Tribunal shall, within one hundred and twenty days of the receipt of such application, draw up a statement of the case and refer it to the High Court.'
7. The relevant portion of this section is that the assessed may within sixty days of the date upon which he is served with a notice of the order apply in the prescribed form requesting a reference to the High Court. The most important part of the section is to refer to the High Court any question of law arising out, of such order. The interpretation of the section shows that if there are questions of law arising out of the order, then an application has to be moved. As there was only one order covering all the years, it may legitimately be said that one application can suffice to cover all questions of law even if they arise for several years. Thus, one application serves the purpose. It may also be said that even if there is a blunder by filing one application instead of three applications, it cannot be said that that one application is beyond time because it was filed within the period of limitation.
8. For the purpose of seeing whether such a contention is bona fide or not, we have to examine, whether on a reading of the section, it can legitimately be inferred that only one application is necessary. No doubt, the wording of the section shows that one application may be filed and if there is an objection, then more applications can be filed. To offset this, it may be noticed that in actual fact, the applicant did file three applications under section 256(1). So, the assessed had no doubt that separate applications had to be filed for the three years. Having filed three separate applications under section 256(1), the assessed could have little difficulty in filing three separate applications under section 256(2).
9. One of the principles on which section 5 has been applied is that if there is a plausible Explanationn for the delay, it should be accepted and further, no party should be penalised for the default of his agent or counsel. It so happens that learned counsel for the assessed has died and, thereforee, we do not actually know what was in his mind. It is preferable in such cases to give the benefit of doubt to the assessed. We may, thereforee, say that in this case, there was a doubt in the mind of counsel as to whether one application had to be filed under section 256(2) or, whether three applications had to be filed. Even when the matter came before the Bench in 1980, the Bench granted two weeks' time for filing the additional two applications. Furthermore, we note that the single application under section 256(2) filed on February 8, 1979, was within the period of limitation. The Registry returned it on February 9, 1979, but there was no objection that separate applications should be filed. The requirement of separate applications was first brought to the notice of learned counsel on January 16, 1980, when the case came before the Bench and then the court granted two weeks' time within which time the two additional applications were filed. So, this can be treated as a case in which even the Registry did not raise the objection and the court granted time for the rectification of the error within which time the two additional applications under section 256(2) were filed. We would thus condone the delay in the circumstances of this case. This would mean that the two applications, C.M. No. 156 of 1980 in I.T.C. No. 29 of 1980, and C.M. No. 158 of 1980 in I.T.C. No. 30 of 1980, would stand allowed.
10. One additional point urged by the learned counsel for condoning the delay and also for the contention that one application was sufficient, was the fact that the questions of law in all the three years were more or less common and the three years had been treated as one composite unit for the purpose of deciding the cases by the Income-tax Appellate Tribunal. The reason was that over a period of years, the assessed had taken loans, which, according to the Department, had been utilised principally for making advances to the individual partners and, thereforee, the interest was not allowable as a business expense.
11. In view of the identity of facts for the three years and the commonness of the questions, we think this is an additional reason why the learned counsel might have thought that one application was sufficient.
12. Turning now to the merits of the case, the there assessment years involved are 1968-69, 1969-70 and 1970-71. The subject-matter of the reference sought is the interest claimed by the assessed for the various years on borrowed capital. The Income-tax Officer found that in each year substantial advances were made to the partners and, accordingly, it was held that the entire interest was not to be allowed as a deduction. The Income-tax Officer found that out of a sum of Rs. 29,64,306, which was the borrowed capital with the firm, a sum of Rs. 17,35,000 had been advanced to the partners. He, thereforee, disallowed a sum of Rs. 1,69,150 for the assessment year 1968-69, Rs. 1,54,350 for the year 1969-70 and Rs. 1,90,706 for the assessment year 1970-71. The assessed appealed to the Appellate Assistant Commissioner who came to the conclusion that some amount had to be disallowed, but not the same as found by the Income-tax Officer and so he reduced the amount for each year.
13. It was urged before the Tribunal in a further appeal that the assessed had its own self-generated funds as well as borrowed money and there was nothing to show that payments were made out of the loans. If payments were made out of the mixed funds, it was claimed that the assessed could get the benefit. The Tribunal has partly accepted this contention of the assessed and given certain directions to the Income-tax Officer to compute the amount.
14. In its application under section 256(1), the assessed had claimed that the Tribunal had not properly followed the judgment of the Supreme Court in Addanki Narayanappa v. Bhaskara Krishnappa, : 3SCR400 . It also raised the point whether the Tribunal was right in concluding that part of the borrowed funds had been diverted to non-business user and furthermore, whether for the purpose of calculating the amount, the right proportion had been adopted by the Tribunal.
15. We have gone through the facts and circumstances of the case in great detail. The balance-sheet position of the assessed-firm seems to be quite plain. There was a substantial borrowing from banks and other institutions and these monies might to some extent have been used in business, but there was also substantial increase in the debit balances of the partners qua the firm. We agree that the question as to how these borrowed monies were used depends on the working of the firm. But the examination of the balance-sheet shows that the increase in the borrowings was reflected largerly in the increase of the advances to the partners. As indicated in the Tribunal's order, a comparison between the increase between 1962 to 1967, indicates the extent to which the borrowings increased and the advances to the partners also increased. On December 31, 1961, the secured loans were Rs. 1,54,821 and the unsecured loans were Rs. 5,15,714. On December 31, 1967, these amounts became Rs. 4,59,036 and Rs. 27,21,778, respectively. The increase over these six years in the loans was Rs. 25,10,319. At the same time, the increase in the advances to the partners was Rs. 20,17,861, thus showing that the increase in advances from third parties was correspondingly represented by the increase in advances to the partners. In other words, the assessed-firm borrowed money on interest and advanced the same without interest to its partners. The Income-tax Appellate Tribunal and the Appellate Assistant Commissioner found that the entire advance was not to be treated as a loan for non-business purposes and on an examination of the facts revealed by the accounts of the firm, the Tribunal came to the conclusion that the partners were entitled to adjust the losses in the firm's business and also the profits and only the other withdrawals had to be treated as interest-free non-business loans.
16. In the course of the discussion, it was stated by the Tribunal that the partners could not withdraw their capital and this part of the order has been challenged by the learned counsel. We do not think this raises a question of law. The partners may withdraw anything that is permitted by law from the accounts of the firm, but when borrowed money is used for such withdrawals, the question that arises is whether the interest paid on those borrowings can be treated as interest on borrowed capital permitting a deduction under section 36(iii) of the Act. Money which is borrowed and given to the partners is not capital being employed by the firm, but is rather capital being employed by the partners. The question as to how the computation is to be made for determining what are the legitimate borrowings and what are the non-business borrowings has to be made on the facts of the case. This is a finding which cannot be treated as a question of law. It is a finding of fact.
17. We would accordingly hold that the conclusion of the Tribunal is one of fact and not one of law and accordingly decline to call for a statement of the case. The application is rejected, but with no order as to costs.