CHHOTALAL KESHAVRAM Vs. COMMISSIONER OF INCOME TAX

JUDGEMENT

(1.) THIS is a composite reference under S. 66(1) and S. 256(1) of the Indian IT Act, 1922, and the IT Act, 1961, respectively, made by the Tribunal, Nagpur Bench, Nagpur, at the instance of the assessee, requiring certain questions of law, said to arise from its orders in IT Appeals Nos. 521 of 1968 -69, 18691 and 18692 of 1966 -67, 9688 and 19396 of 1967 -68 dt. 31st March, 1971, pertaining to the asst. yrs. 1959 -60 to 1962 -63 to the High Court for its opinion, namely:

(2.) THE firm, styled "M/s. Chhotalal Keshavram, Rajnandgaon", constituted of two partners, Ghanshyamdas Chhotalal and Rameshchandra Chhotalal, carrying on business of manufacture and sale of bidis, was reconstituted by a partnership deed dt. 29th Dec., 1954, whereby a third partner, Amrutlal Somabhai, was introduced as a financing partner. At the time when the business was taken over, the total liabilities of the firm amounted to Rs. 6,44,655. After adjusting certain assets of the firm, there was an excess of liabilities over the assets amounting to Rs. 4,09,628 and this amount was debited to the accounts of the two partners, Ghanshyamdas Chhotalal and Rameshchandra Chhotalal, in equal shares. As provided by cl. 5 of the deed of partnership, funds were to be provided by Amrutlal Somabhai and he was made entirely responsible for managing the business. Clause 6 of the deed reads as follows :

(3.) DURING the assessment years in question, the personal accounts of the two partners, Ghanshyamads Chhotalal and Rameshchandra Chhotalal, in the account books of the firm were debited with Rs. 31,447, Rs. 10,833, Rs. 19,200, Rs. 30,141 and Rs. 30,343 on account of interest payable by them to the firm for the debit balances pending in their names, of Rs. 2,66,121 each. Similarly, the personal account of Amrutlal Somabhai, who furnished capital for the going concern, was credited with interest on the amount of loan advanced by him to the firm. The amount of interest debited to the account of the two partners, Ghanshyamadas Chhotalal and Rameshchandra Chhotalal, as well as the amount of interest credited to the account of Amrutlal Somabhai, were included in the interest account maintained in the books of the firm, and the resultant amount went into the profit and loss account of the firm. Thus, it appears that the debit entries on account of interest payable by the two partners, Ghanshyamadas and Rameshchandra, passed through the books of the firm.