TMI Blog1965 (2) TMI 109X X X X Extracts X X X X X X X X Extracts X X X X ..... 7; 4,26,000 and odd, and M.R. Shah had similarly taken advances of ₹ 1,50,000 and ₹ 2,50,000 roughly. In addition to this, the firm had also paid income-tax on behalf of the partners. In the course of the assessment proceedings of the firm for the year 1957-58 the relevant account year being the Samvat year 2012, between November 15, 1955, and November 2, 1956, it was found that while the firm had paid interest of nearly a lakh of rupees on the amounts borrowed by it, it had not charged interest on the accounts of the partners to whom it had advanced the moneys. Equally, the firm had made advances to another firm known as the Sangli firm to the tune of ₹ 1,28,000 and odd, upon which also it had not purported to recover any interest. In explanation of the situation, the firm stated that the advances to the Sangli firm were in the course of the business, and that the amounts drawn by the two partners from the drawing account were invested by them in the acquisition of shares, properties, etc., the income from which was subjected to tax in their hands. It was further claimed that the income-tax advances to the two partners could not be treated as personal drawings. B ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... me-tax Appellate Tribunal. The Appellate Tribunal accepted as correct the view taken by the department that the bulk of the borrowings was utilised for purposes other than that of the business of the firm, so that the disallowance in the firm's assessment was upheld. In the case of the partners' assessments, the Tribunal pointed out that even the acquisition of properties by the partners and the payment of income-tax on the income from those properties or investments did not accrue to the benefit of the firm, and unless such a result could be postulated, the interest payment by the firm on its borrowings could not be allowed in the computation of the individual income of the partners. Applications by the firm and the two individual partners under section 66(1) of the Act being rejected, this court directed the Tribunal to state a case under section 66(2) of the Act and accordingly the following questions stand referred to us: 1. Whether, on the facts and circumstances of the case, the disallowance of interest payment of ₹ 71,500 or any part thereof in the assessment of the firm was right in law? 2. Whether the sum of ₹ 71,500 paid by the firm towards i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... T.C. 209 has been cited. In that case, the assessee-firm was carrying on a banking business with borrowed money. It was also running a separate piece-goods business and advances were made to that business. This piece-goods business was closed and loss resulted of the sums invested therein. The claim was made by the assessee-firm that it was entitled to deduct the interest paid on that part of the capital employed in the piece-goods business. This was disallowed, the view taken by the lower authorities being that since the sums so advanced had been lost in the previous year, they were no longer available as capital of any business done by the firm in the account year. The learned judges took the view that it could not be regarded that there were two separate and distinct businesses. They accepted the position that money was borrowed for the purposes of the business and was employed in the business until it was lost. They say: Nevertheless, interest had to be paid on it and the test seems to us to be not whether it continued to be available for the purposes of the business during the year of assessment, but whether it was in its origin money borrowed as capital for the assessees& ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... carrying on. It was, however, found that even four years prior to the account year in question, the company had ceased to carry on those other businesses but continued only to hold the shares referred to. On a reference, this court held that the various concerns acquired by the company were separate businesses, and that section 10 of the Act only dealt with the businesses that were being carried on, and not with businesses which had ceased to be carried on. This decision does not directly apply, for it was a case of set-off governed by section 24 of the Indian Income-tax Act. Mr. Balasubrahmanyan points out that Beasely C.J., who was a member of the Bench which decided A.L.A.R. Brothers v. Commissioner of Income-tax.[1928] 3 I.T.C. 209 and who was also a member of the Bench which decided the later case, purported to explain that that earlier decision was erroneous in so far as it decided that the piece-goods business carried on by A.L.A.R. Firm in that case was not a separate business. We do not however think that the ultimate decision in A.L.A.R. Brothers v. Commissioner of Income-tax** was in any way affected in so far as the principle that was laid down in that decision is conc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... such profits or gains is used. It is accordingly the contention of the learned counsel that unless the business is carried on, no question of grant of any allowances under sub- section (2) can at all arise. In the instant case, learned counsel for the department urges that the money-lending business was not carried on at all and, therefore, no question of allowance of interest paid on borrowed capital can arise. This line of argument does no doubt pose some difficulty, but we are not able to agree that solely for the reason that the business had to be stopped, the interest on capital which had been borrowed and which is outstanding is not at all allowable. This aspect of the matter we have dealt with sufficiently in the earlier part of this judgment. The further question that we have indicated is whether the advances made to the partners can be said to be in the course of the business activities of the firm. There is nothing in law which prevents a firm from lending out moneys to its own partners and the partner figuring as a debtor to the firm. But where the partner utilises the funds of the firm for his own individual purpose, could it be said that the money so taken by the p ..... 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