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TMI Blog1965 (8) TMI 7X X X X Extracts X X X X X X X X Extracts X X X X ..... e consideration was satisfied by the allotment of shares in the company. The partners were each debited with Rs. 3,27,500. Each partner was credited with his share of the goodwill amounting to Rs. 1,87,500. The two partners were also partners in another firm of the same name at Sangali, which will hereafter be called the Sangali firm. The assessee-firm advanced moneys to the Sangali firm with the result the Sangali firm owed the assessee-firm to the extent of Rs. 1,28,378. The Sangali firm closed its business in the year 1948. Further, this firm paid income-tax on behalf of the partners which was kept in a separate account. Thus, for the years 1958-59 and 1959-60, the firm's liability on which it paid interest was Rs. 10,75,228 and Rs. 9,67,675 respectively. It was for these amounts the assessee-firm claimed interest payments amounting to Rs. 86,152 and Rs. 86,325. The Income-tax Officer disallowed a sum of Rs. 76,675 for the assessment year 1958-59 and similarly, another sum of Rs. 74,496 for the assessment year 1959-60. Similarly, the two partners claimed in their individual assessments a deduction of interest amounting to Rs. 38,338 each, in case the interest payment by the firm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f Rs. 76,675 paid by the firm of Roopchand Chabildass and Sons was allowable as a deduction under section 10(2)(iii) or 12(2) in the assessment of the assessee ?" The firm as well as its partners made a similar claim of interest payment in their return for the assessment year 1957-58. The Income-tax Officer, for the same reasons mentioned above, disallowed a sum of Rs. 71,500. The Tribunal also held that the bulk of the borrowings was utilised for the purpose other than that of the business of the firm. When the matter was finally referred to this court under section 66(2) of the Act in Milapchand R. Shah v. Commissioner of Income-tax, a Bench of this court, to which one of us was a party, confirmed the decision of the Tribunal on the ground that, though the firm was doing some money-lending business at the beginning, during the relevant year it had ceased to do that business, that the major part of the amount was advanced to the partners of the firm themselves, that the advances made to the partners were not in the course of the business activities of the firm, that the partners of the firm utilised the borrowed capital for their own purposes and that the partners of the firm wer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not shown to them that, after the transfer of the business, the borrowed money was diverted to some other business activity of the assessee and that, on the other hand, substantial amounts of the loans had been diverted to the partners' accounts to pay income-tax and to meet the liabilities of a firm in which they were substantially interested. Further, it is common case that the firm was carrying on wheat and gram products and also flour-mill business. In the year 1954, the partners of the firm sold away the flour-mill business. In effect, the firm as such was not carrying on business in flour-mill. The partners of the assessee-firm were also the partners of the Sangali firm. In 1948, the Sangali firm closed the business. The assessee firm attempted to treat the advances made to the Sangali firm as bad debts, which were rejected by the revenue authorities. The partners of the firm were taking steps to collect the outstanding debts due to the firm with a view to close down the money-lending business. The firm paid income-tax due and payable, by the partners of the firm from and out of the borrowed capital. The firm also made advances to its partners to enable them to pay the value ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The assessees are claiming this deduction in their individual capacity for the first time in the assessment years 1958-59 and 1959-60. The firm sold away the flour mill business to the South India Flour Mills Ltd. in the year 1954. One of the terms of the agreement of sale was that the company should allot shares to the extent of Rs. 3,27,500 to each of the partners. Accordingly, whatever amount was advanced by the firm to the partners for the purpose of purchase of shares in the company was debited in the individual accounts of the partners in the firm. They were never charged any interest nor debited interest in their accounts of the firm till the assessment years in question. It was only when the firm failed to get a deduction of interest paid on the borrowed capital for the assessment year 1957-58 and when the partners in their individual capacity failed to get a deduction claimed by the firm, the firm began to make debit entries for the amounts advanced to the partners for the purchase of shares. It is clear that when an assessee wants any deduction to be made under section 12(2), he has to satisfy four conditions, viz., (1) the expenditure must be incurred solely for the purp ..... X X X X Extracts X X X X X X X X Extracts X X X X
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