The situs of accrual of interest is determined by considering factors such as the place of advancement of loan, the place of repayment of loan and interest, and the principle that the debtor should seek the creditor.

1. - The Income-tax Appellate Tribunal, Delhi Bench A, has made this reference for answering the following question of law :

"Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the sum of Rs. 35,302 was the income of the assessee which accrued in Part 'C' State and not in Part 'B' State ?"

2. The assessee, M/s. Mansinghka Bros. (P.) Ltd., Bhilwara, is a private limited company having its head office at Bhilwara which was at the material time in a Part 'B' State. The assessee company had advanced loans to Shree Bijay Cotton Mills Ltd. and to Shree Bijay Sugar Mills Ltd., Bijainagar in a Part 'C' State. The assessee company had earned an income of Rs. 1,10,369 during the accounting year ending 31st March, 1951, which included income from interest amounting to Rs. 35,302. It had an income of interest of Rs. 22,526 from Shree Bijay Cotton Mills Ltd. and Rs. 12,776 from Shree Bijay Sugar Mills Ltd. The ITO by his assessment order dated November 29, 1952, held that the amount of interest accrued to the assessee in a Part 'C' State and as such no rebate is admissible according to the Part 'B' States (Taxation Concessions) Order. The assessee went in appeal before the AAC of Income-tax, 'B' Range, Delhi, who by his order dated April 23, 1954, while dismissing the appeal of the assessee, found that both the interest items in question accrued to and were really earned by the appellant at Bijainagar and not at Bhilwara. The assessee further went in appeal before the Income-tax Appellate Tribunal, Delhi Bench, which by its order dated April 11, 1955, accepted the contention of the assessee and held that the income from interest on the loan was received by the assessee in a Part 'B' State. However, on, rectification application, that order was set aside by the Tribunal by its order dated March 14, 1956, and the appeal was reheard and on August 11, 1958, the order of the AAC was set aside and the case was sent back to the AAC to make further inquiries on the lines directed by the Tribunal and to dispose of the appeal afresh according to law. The AAC reheard the appeal and again decided the question against the assessee by its order dated April 8, 1968. The assessee further went in appeal before the Tribunal and the Tribunal, by its order dated May 18, 1970, rejected the appellant's contention and held that the income from interest accrued to the assessee in a Part 'C' State. Further, Misc. Application was presented for rectification of a mistake, but the Tribunal by its order dated December 3, 1970, rejected the application and a reference application was made by the assessee, on which the Tribunal has referred the above question of law for being answered by this court.

3. The Tribunal in its order dated May 18, 1970, observed as under :

"Though the charging sections of the Income-tax Act assume that income, profits or gains have a situs, in the absence of proper indication as to how the situs is to be determined, we are to consider it according to general principles of law and how there was inter-related connection between accrual of interest and situs of accrual of interest. Sufficiency of territorial connection involves consideration of two elements : (a) connection should be real and not illusory, (b) liability sought to be imposed must be pertinent to the connection. From the facts of the case, we cannot hold that the connection upon which the counsel for the assessee relied was real. According to us, connection is illusory because purchasing agents are no independent entities, amounts were adjusted in the head offices of the debtor companies, whatever entries had been made were made in the primary books of account of the head offices of debtor-companies. Title to money lent passed to the debtor-companies in Part C States, goods were purchased for manufacturing purposes and manufacturing operations were made in Part C States and nothing could be found that any part of the inco