VENKATADRI J.

These are references under section 66(1) of the Indian Income-tax Act. The facts out of which the references arise are the following: The assessee in T. C. No. 7 of 1963 is a registered firm, Messrs. Roopchand Chabildass & Sons, who will herein after be referred to as the firm. It consists of two partners, Milapchand R. Shah and Punamchand R. Shah, who are the assessees in T. C. Nos. 9 of 1963 and 14 and 37 of 1963, respectively. The firm was carrying on business in the manufacture and sale of wheat and gram products and also in money-lending. In the month of October, 1954, the said two partners of the firm transferred their flourmills business together with the building, machinery and plant including the goodwill to a limited company floated by the partners themselves called the South India Flour Mills Ltd. for a consideration of Rs. 6, 55, 000. The consideration was satisfied by the allotment of shares in the company. The partners were each debited with Rs. 3, 27, 500. Each partner was credited with his share of the goodwill amounting to Rs. 1, 87, 500. The two partners were also partners in another firm of the same name at Sangali, which will hereafter be called the Sangali firm. The assessee-firm advanced moneys to the Sangali firm with the result the Sangali firm owed the assessee-firm to the extent of Rs. 1, 28, 378. The Sangali firm closed its business in the year 1948. Further, this firm paid income-tax on behalf of the partners which was kept in a separate account. Thus, for the years 1958-59 and 1959-60, the firm's liability on which it paid interest was Rs. 10, 75, 228 and Rs. 9, 67, 675 respectively. It was for these amounts the assessee-firm claimed interest payments amounting to Rs. 86, 152 and Rs. 86, 325. The Income-tax Officer disallowed a sum of Rs. 76, 675 for the assessment year 1958-59 and similarly, another sum of Rs. 74, 496 for the assessment year 1959-60. Similarly, the two partners claimed in their individual assessments a deduction of interest amounting to Rs. 38, 338 each, in case the interest payment by the firm was disallowed for the said assessment years The main grounds of the authorities for disallowing the interest claim by the firm were due to the finding that the firm stopped its flour mill business from 1954, that the borrowings made by the firm were diverted for non-business purposes such as payment of income-tax on behalf of the partners of the firm, that the moneys advanced to the Sangali firm in which the partners were virtually the same was not in the course of the business of the firm, that a perusal of the accounts showed that the firm was taking steps to recover old advances with a view to close down the business, that the interest debited in the individual accounts of the partners was for moneys advanced to the partners themselves, that it was not the business of the firm to advance loans to its partners and that in no sense of the term could the moneys debited to the partners be taken as advances for interest. On further appeal, the Tribunal also found that the flour-mill business of the firm was sold with its goodwill in 1954 to a limited company for a consideration of Rs. 6, 55, 000 and the said consideration did not go into the firm's account to reduce its liability. There was nothing on record to show that, after the transfer of the flour-mill business, the borrowed money was diverted to some other business activity of the firm ; on the other hand, substantial amounts of loans had been diverted to the partners' accounts to pay income-tax and to meet the liabilities of the Sangali firm in which they were substantially interested. For these reasons, the Tribunal confirmed the finding of the Appellate Assistant Commissioner and rejected the claim of the firm. The assessee-firm requested the Tribunal to state a case, and inasmuch as in the opinion of the Tribunal a question of law did arise out of its order, the Tribunal has referred the following question