1. - This reference under section 256(1) of the Income-tax Act, 1961, at the instance of the Revenue, is to answer the following question of law, namely :

"Whether, on the facts and in the circumstances of the case, and on a correct interpretation of the provisions of section 40(b) of the Income-tax Act, 1961, only the net and not the gross amount of interest paid to each of the partners in the instant case shall be deducted in computing the assessee-firm's income chargeable under the head "Profits and gains of business" for the accounting period relevant to the assessment year 1978-79 ?"

2. The relevant assessment year is 1978-79 for which the accounting period ended on November 11, 1977. The assessee is a partnership firm comprising of six partners. The books of the assessee contained the capital account of each of the partners as well as the account showing withdrawals made by the parties. In respect of the credit entries in favour of each partner, the assessee-firm paid interest and had also charged interest in respect of the debit entries of each of these partners. The total amount of interest paid by the assessee-firm to its six partners amounted to Rs. 25,226 while th