JUDGMENT

Valmiki J.Mehta, J.

1. The following question of law has been referred to this Court for opinion by the Income Tax Appellate Tribunal (=I.T.A.T.), Delhi:

"Whether, on the facts and circumstances of the case, the Tribunal was correct in holding that no portion of the interest paid by the assessee on its borrowed funds can be disallowed on the ground that a portion thereof has been diverted to subsidiary company".

2. The facts of the case on the basis of which the above question has been referred are that the assessee company M/s. Dalmiya Cement (Bharat) Limited manufactures and deals in cement and dead burnt magnesite. Its method of accounting is mercantile and the accounting year for the assessment years 1976-77 and 1977-78 ended on 31.12.1975 and 31.12.1976, respectively. The assessee company had advanced an interest free loan to the tune of Rs.40,00,000/- to its 100% subsidiary company, namely, M/s. Srirangam Investment Company, Limited. The Income Tax Officer(=ITO) noted from the accounts that the interest bearing borrowings from banks and public had increased during the year 1976-77 to Rs.1,14,46,904/- and Rs.68,16,000/- against Rs.3,78,797/- and Rs.53,81,000/-, re