JUDGMENT

Dr. ANAND, J.:—This appeal, on a certificate of fitness granted by the High Court under Art. 133 of the Constitution of India is directed against the judgment in Civil Misc. Writ Petition No. 1541 of 1974 decided by the Allahabad High Court on 24-11-1976 : (reported in 1977 Cur Tax Rep 73) and arises in the following circumstances :

The appellant is a firm which was assessed to income-tax at Azamgarh (U.P.). In the Income-tax Returns for the assessment year 1963-64, the assessee claimed that it had borrowed a sum of Rs. 50,000/- from M/s. Jain Finance Distributor (India) Private Limited, Calcutta (hereinafter called the Calcutta company) on 19-5-1962. An entry dated 25-5-1962 in that behalf was made by the assessee in its books of account as well as in the balance sheet as liability. The loan was stated to have been raised in cash and it was also claimed to have been returned in cash in 1968, though the interest on loan was stated to be paid by cheque/bank drafts till repayment in 1968. During the assessment proceedings, the Income-tax Officer directed the assessee to file a copy of the account of the Calcutta company to support the loan transaction. The assessee produced a confirmatory letter dated 15-11-1963 from the Calcutta company, confirming the payment of loan of Rs. 50,000/- to the assessee. The case of the assessee before the ITO was that one of its partners, namely Bajrang Lal, (since deceased) had gone to Calcutta on 13th May, 1962 with a draft of Rs. 31,000/- and Rs. 151/- in cash in order to make payment of outstanding at Calcutta. For making certain purchases of cloth and for payment of other outstandings against the assessee, the said partner, while in Calcutta, raised a cash loan of Rs. 50,000/- from the Calcutta company and on his return to Azamgarh on 25th May, 1962 necessary entries were made in the books of account of the assessee showing a credit of Rupees 50,000/- from the Calcutta company by way of cash loan to the assessee. The ITO finalised the return and for each of the assessment years 1963/64 to 1968/69, the ITO allowed deduction of interest claimed to have been paid to the Calcutta company by the assessee. From a perusal of the record it appears that the Income-tax Officer entertained some doubts about the genuineness of the loan transaction and accordingly he addressed a letter to the Income-tax Officer, District Companies (III)-196/ J/1, Central Revenue Building, Calcutta on 19th May, 1970 enquiring if the Calcutta company fell within its jurisdiction. It was stated by the ITO in that letter that he wanted to gather certain information from the case records of the Calcutta company. In reply the ITO Calcutta on 7-7-70 sent the following communication to the ITO Azamgarh:

"Confidential

Regd. Post A/D.

OFFICE OF THE INCOME-TAX

OFFICER, "K" WARD,

COMPANIES DISTT. III P/7,

CHOWRINGHREE SQUARE,

CALCUTTA

No. C-III/ J-46/K./606 Date 7-7-70

Income-tax Officer,

A Ward, Azamgarh,

(by name)

Subject : M/s. Jain Finance Distributors (India) Private Ltd., 34/IB, Sudhir Chatterjee St., Calcutta.

Reference : Your letter No. P306/ A, D/ 19-5-10 addressed to ITO "I" Ward, Companies Dist. III, Calcutta.

Please refer to your above letter asking for some information about Jain Finance Distributors India Private Ltd. This company is now assessed to tax in my ward. I have however to inform you that according to the confession of Shri Tara Chand Surana Mg. Director of the company it appears that the so-called company is really a dummy concern of Shri Surana. The company never actually advanced any loans to any person and according to the confession of Shri Surana the business of the company consisted entirely of name-lending. The company lent its name to enable different parties to bring into their books black money under the guise of loan from Jain Finance Distributors (India) Pvt. Ltd. No finance was ever distributed, only the name of the concern was lent.

This position has been accepted in the assessments of the company for