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PETITIONER: BADAL RAM LAXMI NARAIN

       Vs.

RESPONDENT: C.I.T. LUCKNOW

DATE OF JUDGMENT12/07/1991

BENCH: SHETTY, K.J. (J) BENCH: SHETTY, K.J. (J) YOGESHWAR DAYAL (J)

CITATION:  1991 AIR 1787            1991 SCR  (2) 920  1991 SCC  (3) 652        JT 1991 (3)    44  1991 SCALE  (2)49

ACT:      Income Tax Act, 1922: Section 36(1)(iii)-Computation of Income-Income-Interest  paid on  borrowed  capital-Deduction of-Partition  of HUF business-Formation of partnership  firm by  members  of  HUF-Take over of  HUF  business  and  debit balance-Whether interest paid on debit balance an  allowable deduction.

HEADNOTE:      The partners of the assays-firm were members of a  HUF, which  was  carrying  on  business  with  borrowed  capital. Consequent on partial partition in the family and  partition of the family business, the members formed the  assays-firm. There  was  a debit balance in the capital  account  of  the family which was transferred to the personal accounts of the partners of the firm.  The firm, which continued the  family business   and  took  over  the  business  assets  and   the liabilities  of the HUF, claimed that the interest  paid  on the  debit  balance  was  an  allowable  deduction  in   the computation  of  income since it had taken  over  the  debit balance  in consideration of the goodwill of  the  business. The  Appellate  Assistant  Commissioner held  that  the  HUF business had no goodwill.  On appeal, the Tribunal held that the  HUF had a very long-standing and flourishing  business, and  hence the firm could be deemed to have taken  over  the liability  in consideration of the sale of goodwill and  the interest paid thereon was an allowable deduction.      On a reference made by the Tribunal the High Court held that  the  goodwill of the HUF business was  never  sold  or purchased,  and that the partners of the firm were bound  to take  over  the HUF’s liability, since it was  that  of  the family  of  which they were members, and  became  liable  to discharge their share of the debt. Allowing the appeals preferred by the assessee, this Court      HELD:  1.1 Clause (iii) of Section 36(1) of the  Income Tax  Act, 1922 applies only where capital has been  borrowed for the purposes of the business or profession.  The  amount of  interest  paid on the borrowed capital is  an  allowable deduction.   It cannot be disputed that if the  goodwill  is purchased out of the borrowed capital, the interest paid  on the borrowed capital is an allowable deduction. [923B]

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                                                      921      1.2  In  the  instant case, there was  only  a  partial partition  in  the family, particularly with regard  to  HUF business and it was not necessary for the firm to have taken over  the debit balance of the HUF, since the HUF had  other properties. [923D]      1.3  The Tribunal has correlated the debit  balance  to the  purchase of goodwill since the firm had taken over  the business.  The High Court has held that there was no sale of goodwill  by the HUF to the firm in view of the  absence  of related  entries  in  the  books of  account  of  HUF.   The conclusion of the High Court is as much an inference as that the  Tribunal  on the same set of facts  and  circumstances. The  Tribunal was right in holding that the firm  had  taken over  the debit balance in consideration of the sale of  the goodwill  and  this conclusion is  neither  unreasonable  or unwarranted, nor arbitrary or unjust.  The High Court  ought not  to interfere with such conclusion even if another  view is  possible.  Besides, the relevant point to be  considered is  the rights of the assessee and not the liability of  the individual members of the HUF. The claim of the assessee for allowable deduction of the interest paid cannot be  defeated by  the  existence of personal liability of the  members  of HUF. [923C, E, F]

JUDGMENT:      CIVIL APPELLATE JURISDICTION: Civil Appeal Nos. 657  of 1979 & 2117-21 of 1977.      From the Judgment and Order dated 20.1.1978 &  6.5.1976 of  Allahabad High Court in Income Tax Rule No.  502/74  and Income Tax Reference No. 827 of 1973.      S.B.L.  Srivastava, Manoj Swarup and Lalita  Kohli  for the Appellants.      J. Ram Murthy, K.P. Bhatnagar and Ms. A. Subhashini for the Respondent.      The Judgment of the Court was delivered by      K.  JAGANNATHA  SHETTY, J. The  common  question  which arises  for  decision in these appeals by special  leave  is whether the interest paid on a debit balance of Rs. 1,75,310 taken  over  by the assessee firm from the  erstwhile  Hindu Undivided  Family  (HUF), would be  an  allowable  deduction under Section 36(1) (iii) of the Income Tax Act, 1922.                                                        922      The partners of the firm were members of the HUF  which carried on business at Varanasi in the name of M/s Badal Ram Laxmi Narain.  The family had no capital of its own and  had been  running business with the help of borrowed money.   On 20 October 1951, there was partial partition in the  family. As  a  result  whereof  the  business  of  the  family   was partitioned between the members of the family.  The  members formed  themselves into partnership and continued  the  same business.   On  the  date of partition, there  was  a  debit balance  of  Rs.  1,75,310 in the  capital  account  of  the family.   This  debit  balance  was  transferred  in   equal proportion to the personal accounts of the three partners of the  firm.   The newly formed firm took  over  the  business assets as well as liabilities of the HUF. The question arose as  to  whether the interest paid by the firm  on  the  said debit balance was an allowable deduction in the  computation of  its income?  One of the contentions urged for  the  firm was  that  the debit balance was taken over by the  firm  in consideration   of  the  goodwill  of  the  business.    The Appellate  Assistant  Commissioner  had held  that  the  HUF

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business  had no goodwill.  The Tribunal did not agree  with the Appellate Assistant Commissioner.  It has observed  that the business of the HUF was of a very long standing and  the previous years returns and assessment of income prior to the date  of  partition indicated that the HUF  had  flourishing business.  Since the running business was taken over by  the assessee with the debit balance, the Tribunal expressed  the view  that  the  firm  could be deemed  to  have  taken  the liability  of Rs. 1,75,310 in consideration of the  sale  of goodwill  and  the interest paid thereon  was  an  allowable deduction.     The following question of law was referred to the High Court.          "Whether  on the facts and in the circumstances  of          the   case,  the  assessee  was  entitled  to   the          deduction  of  interest  on  a  debit  balance   of          Rs.1,75,310  taken  over from the  erstwhile  Hindu          Undivided Family?"      The  High Court examined the facts of the case to  find out whether there was any sale of the goodwill.  It observed that  the  goodwill of the HUF business was  never  sold  or purchased.  Had there been any such transaction, appropriate entries  in the books of account of the HUF would have  been made.   The  HUF  should have credited  the  amount  in  its account  in respect of the price paid for the  goodwill  and since  there  was no such entries, there could  not  be  any inference that the firm has taken over the liability of  Rs. 1,75,310 for the  sale of goodwill.  The High Court also has observed that the partners of the                                                        923 firm  were bound to take over the liability of HUF  because, the  liability  was that of the family of  which  they  were members  and  on  partition every member  became  liable  to discharge the debt according to his share.      Clause  (iii)  of  Section  36(1)  applies  only  where capital  has been borrowed for the purposes of the  business or profession.  The amount of interest paid on the  borrowed capital is an allowable deduction.  It is not in dispute and indeed cannot be disputed that if the goodwill is  purchased out  of  the  borrowed capital, the  interest  paid  on  the borrowed  capital is an allowable deduction.   The  Tribunal has correlated the debit balance to the purchase of goodwill since  the  firm has taken over the running  business.   The High  Court has held that there was no sale of  goodwill  by the  HUF  to  the firm in view of  the  absence  of  related entries  in the books of account of HUF.  The conclusion  of the  High Court seems to be as much an inference as that  of the Tribunal on the same set of facts and circumstances.  It is  important  to point out that there was  only  a  partial partition  in  the family, particularly with regard  to  HUF business.   It was not necessary for the firm to have  taken over  the debit balance  of the HUF since the HUF had  other properties.   The conclusion of the Tribunal that  the  firm has   taken  over  the  debit  balance  of  Rs.1,75,310   in consideration of the sale of the goodwill, in the  premises, stands   to  reason.   Indeed,  it  seems  to   be   neither unreasonable  or unwarranted, nor arbitrary or unjust.   The High Court ought not to interfere with such conclusion  even if another view is possible.      The  second reason given by the High Court is also  not acceptable.   we  are  concerned  with  the  rights  of  the assessee and not the liability of the individual members  of the  HUF. The claim of the assessee for allowable  deduction of the interest paid cannot be defeated by the existence  of personal  liability  of  the members of the  HUF.   That  is wholly  beside  the  point.  We  are  therefore,  unable  to

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sustain the order of the High Court.      In the result, the appeal are allowed and the  decision of  the High Court is set aside.  The question  referred  to the  High  Court in each case is answered in favour  of  the assessee and against the revenue.      The  assessee shall be entitled to one set of costs  in this Court. N.P.V.                                       Appeals allowed.                                                        924