K. Jagannatha Shetty, J.—The following question has been referred under s. 256(2) of the Income Tax Act, 1961 (hereinafter referred to as 'the Act'), by the Tribunal, Bangalore :

"Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in holding that only the net amount of interest paid by the firm to the partner should be disallowed under s. 40(b) in the firm's assessment ?"

2. The assessee is a firm of nine partners. In respect of each partner, two accounts were maintained for the asst. yrs. 1974-75 and 1975-76 in the books of the firm. The first one was a capital account and the second one was drawing account. The firm credited interest on the credit balance of the partners in the capital account and at the same time it charged interest on the debits to the drawing account. The ITO added the full amounts credited to the capital account of the partners without taking into consideration the amount of interest debited to the partners in their drawing account.

3. In the appeal against the assessment for the year 1974-75, the AAC directed the ITO that only the net payment of interest by the firm to the partners should be added back under