BADAL RAM LAXMI NARAINversusC.I.T. LUCKNOW

                      BADAL RAM LAXMI NARAIN
A
                                        v.
                              C.I.T. LUCKNOW

                                JULY 12, 1991

B   [K. JAGANNATHA SHETTY AND YOGESHW AR DAY AL, JJ .]

       Income Tax Act, 1922: Section 36(J)(iii)-Computation of
  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
C paid on debit balance an allowable deduction.
        The partners of the assessee-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 assessee-firm. There was a debit balance in the
D 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
E 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
F   goodwill of the HUF business was never sold or purchased, and that the
    partners of the firm were bonnd 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 Conrt
G
          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
H
    the borrowed capital is an allowable deduction. [923B]
                                        920
                         BADAL RAM v. C.I.T. !SHETTY, J .]                   921

            1.2 In the instant case, there was only a partial partition in the      A
      family, particularly with regard to HUF business and it was not neces-
      sary for the firm to have taken over the debit balance of the HUF, since
      the HUF had other properties, [9230]

            1.3 The Tribunal has corelated the debit balance to the purchase        B
      of goodwill since the fmn had taken over the business. The High Court
      has held that there was no sale of goodwill by the HUF to the rmn 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 fmn had taken over the debit balance in con-
      sideration of the sale of the goodwill and this conclusion is neither         C
      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     D
      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 & 2117-21of1977.
                                                                                    E
           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.                                                                   F
           J. Ram Murthy, K.P. Bhatnagar and Ms. A. Subhashini for the
      Respondent.

            The Judgment of the Court was delivered by
                                                                                    G
            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.                                                         H
    922                   SUPREME COURT REPORTS            [1991] 2 S.C.R.

        The partners of the firm were members of the HUF which car-
A
  ried 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
B 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 forrned firm took over the business
  assets as well as liabilities of the HUF. The question arose as to
  whether the interest paid by the firrn on the said debit balance was an
c 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 has held that the HUF business had
  no goodwill. The Tribunal did not agree with the Appellate Assistant
D 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 b~siness 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. I, 75,310 in
E consideration of the siile 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 circumtances of the case,
F               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
G   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
H   goodwill. The High Court also has observed that the partners of the
                                                                                     '
                                                                                     '
-                          BADAL RAM v. C.l.T. [SHETTY, J.]                       923

         firm were bound to take over the liability of the HUF because, the
                                                                                        A
         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 B
         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 bor-
         rowed capital is an allowable deduction. The Tribunal has corelated
         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
                                                                                    c
         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 D
         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 E
         view is· possible.

    .I
                The second reason given by the High Court is also not accept-
         able. We are concerned with the rights of the assessee and not the
         liability of the individual members of the HUF. The claim of the asscs-
         see for allowable deduction of the interest paid cannot be defeated by         F
         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 appeals are allowed and the decision of the
         High Court is set aside. The question referred to ;the High Court in           G
         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.