Badal
Ram Laxmi Narain Vs. C.I.T. Lucknow [1991] INSC 150 (12 July 1991)
Shetty,
K.J. (J) 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.
HEAD NOTE:
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] 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]
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 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
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.
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