JUDGMENT

This is a reference u/s 66(2) of the Income Tax Act (XI of 1922). The assessee is a Hindu undivided family which does business in cloth, money-lending and property. For the assessment year 1938-39 the assessee returned an income of Rs. 9,128. The Income Tax Officer examined the books of account and added to the assessable income a sum of Rs. 2,814 from property and Rs. 8,919 from business. The last named sum included an amount Rs. 1,850 on account of interest which had been received from Kunjamal Banwari Lal and it is in respect of this sum of money that a reference has been made to us.

It appears that on November 29, 1927 the assessee advanced a loan of Rs. 15,000 on the security of house property, to Trilokinath Sansarnath, and on March 16, 1929 a further loan was advanced security of the same property for a sum of Rs. 5,000, which included Rs. 1,354 on account of January 30, 1932 the assessee instituted a suit and he ultimately obtained a decree for Rs. 32,000. Meanwhile another suit had been instituted for Rs. 58,000 by one Kanhaiya Lal and the suit was decreed, but for Rs. 2,000 only.

Trilokinath Sansarnath thereafter sold the mortgaged property to Bengalimal. Proprietor of the firm Kunjamal Banwari Lal. In the Sambat year 1992-93 Bengalimal paid three items amounting to Rs. 550, to the assessee and in the following year he similarly paid several items, amounting to Rs. 700. Bengalimal entered these items in the interest account of the books of Kunjamal Banwari Lal : but the Income Tax Officer found that the assessee had credited them in his own books to the personal account of Bengalimal. The Income Tax Officer interrogated the assessee in respect to this matter and the latter said that no instructions had been received from Bengalimal as to whether the sums of money which had been paid from time to time to the assessee should be appropriated to principal or to interest. The assessee was then required to adduce specific evidence on the point and an affidavit of Bengalimal was put in, in which the latter averred : that he had sent no instruction to the assessee as to how these sums of money were to be allocated. The Income Tax Officer noticed that for the Sambat year 1992-93 Bengalimal had debited these various payments to the interest account in his books and had claimed and received an allowance in respect to them u/s 10 of the Act; and he noticed that for the year 1993-94 Bengalimal had similarly debited these items to the interest account in the books, but that at the end of the year a reverse entry had been made debiting these items in the property account, and an allowance was claimed u/s 9 of the Act. The Income Tax Officer formed the opinion that there had been collusion between Bengalimal and the assessee and he drew the presumption that Bengalimal "must have given instructions to the assessee to credit the items towards interest". The Income Tax Officer accordingly held that this sum of Rs. 1,850 should be added to the profits in the interest account.

The assessee appealed to the Assistant Commissioner but the appeal was dismissed. Thereafter an application was preferred before the Commissioner of Income Tax for review u/s 33 or for a reference to this Court u/s 66(2) of the Act. The Commissioner declined to exercise his powers of review u/s 33, but has stated a case and has referred the following question to this Court :

"Whether in the circumstances of this case the Income Tax Officer was justified in holding that the sum of Rs. 1,850 was received by the petitioner as interest in the account year ?"

The Commissioners own opinion is expressed in the following terms :

"I.............. submit that, in the circumstances of the case, the Income Tax Officer was quite justified in having come to the conclusion that the payments were intended to be on account of interest and that such intention was communicated to the petitioner and that the subsequent reversal of the entries was made to support the pleas taken up b