MAROLIA AND SONS Vs. COMMISSIONER OF INCOME TAX

JUDGEMENT

(1.) AT the instance of the assessee, the Tribunal referred the following questions of law for our opinion :

(2.) THE assessee is a firm with three partners. One of the partners of this firm was Ram Deo Marolia. The firm was carrying on business of cotton purchase on commission basis for various cotton mills situated at Kanpur. The partnership was evidenced by a deed of partnership executed on 4th July, 1962. One of the clauses of the said deed, which would be relevant for the purpose of this reference, reads as under :

(3.) THE assessee again filed appeals before the Tribunal. The Tribunal disagreed with the ITO and the AAC that Ram Deo Marolia was liable to pay interest on the loans taken by him from the firm. It held that as the partners had orally agreed not to charge interest on the debit balances, the AAC was not justified in holding that interest on the balance to the debit of Ram Deo Marolia accrued to the assessee. The revenue, however, pointed out that if the addition of interest not charged to the partner was decided against the Revenue, the Tribunal should disallow the interest paid on the borrowings not used for business purposes by the assessee -firm. The Tribunal accepted the argument of the Revenue and holding that since the borrowings obtained by the assessee had not been utilised for the business purposes of the assessee, the deduction of interest on the borrowings was liable to be disallowed. It, however, restricted the disallowances to the amounts added on the debit balance standing in the name of Ram Deo Marolia. It was, thereafter, at the instance of the assessee, that the Tribunal referred the two questions mentioned above.