PREMIER COLONISERS Vs. COMMISSIONER OF INCOME TAX

JUDGEMENT

(1.) THE assessee, a partnership firm, carries on business in real estate and colonisation. For the assessment year 1972-73, the previous year ended December 31, 1971, the assessee claimed deduction of a sum of Rs. 27,751 being interest paid on certain borrowings. THE assessee's sister concern, M/s. Premier Enamel Works, had taken some loans amounting to over Rs. 3 lakhs. THE assessee took over the liability to pay those loans and for that purpose necessary book entries were made by it in its accounts. It was in respect of those loans that the assessee claimed deduction of the aforesaid amount as interest paid to the creditors. THE ITO did not accept the assessee's claim for which the main reason given was that the assessee itself had not utilized the borrowed capital in its business and as such the payment of interest being on behalf of a different person could not be treated as incidental to the carrying on of its business. THE same view was taken on appeals by the AAC and the Appellate Tribunal, and now, at the instance of the assessee, the following question has been referred to this court for its opinion ;

(2.) IT was submitted before us on behalf of the assessee by Dr. K. B. Bhatnagar, advocate, that, on the facts found, the view taken by the Tribunal was erroneous and that the claim was clearly allowable. In our opinion there is little substance in this submission. We may again mention that the facts found by the Tribunal are that the assessee and M/s. Premier Enamel Works are two different partnership firms, though the partners are common to them. The loans had originally been taken by M/s. Premier Enamel Works and the borrowed capital was utilised by that firm in its business. The assessee took over the liability to pay that loan to the creditors and for that purpose necessary entries were made in the books. According to the Appellate Tribunal, the mere fact that the assessee had taken over the liability for repaying these loans would not make those loans the borrowings of the assessee for the purposes of its business. According to the Appellate Tribunal, admittedly, the appellant-firm did not borrow these loans for the purposes of real estate business nor were these funds invested in the lands appearing on the assets side of the balance-sheet of the appellant-firm. In view of this finding, it cannot be said that the amount of interest allegedly paid by the assessee on the aforesaid loans could be treated as a legitimate deduction under Section 36(1)(iii) of the Act. The case of Mills Store Co. v. CIT [1971] 80 ITR 225 (Bom), on which reliance was placed by Dr. Bhatnagar, proceeded entirely on different facts and the ratio laid down therein would not have any application to the present case.

(3.) WE, therefore, answer the question in the negative, in favour of the department and against the assessee. The department is entitled to its costs, which we assess at Rs. 200 and counsel's fee in like figure.