Family arrangement and business borrowings principles: capital gains and interest disallowance were both deleted on the facts.

A bona fide family arrangement, when genuine, voluntary and acted upon in the parties' accounts and conduct, can be effective for tax purposes even if a sale deed is later executed by one family member for convenience because mutation was incomplete; in that situation, capital gains are not automatically assessable in the executant's hands and taxing the same gain would risk double taxation. Interest on borrowings used to repay earlier business loans remains deductible where the borrowing retains its business character and the funds were originally deployed for business purposes. The capital gains addition and the interest disallowance were both deleted.

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Issues: (i) Whether capital gains on sale of the property were assessable in the assessee's hands despite the property having been allotted to family members under a bona fide family arrangement approved by the High Court and acted upon in the accounts and conduct of the parties; (ii) Whether interest paid on borrowings used to repay earlier business loans was allowable as a deduction.

Issue (i): Whether capital gains on sale of the property were assessable in the assessee's hands despite the property having been allotted to family members under a bona fide family arrangement approved by the High Court and acted upon in the accounts and conduct of the parties.

Analysis: The family arrangement was found to be genuine, voluntary and acted upon. The property had been reflected in the balance sheets of the mother and wife, lease income from the property had been offered by them, and the later sale was held to be a convenience transaction executed by the assessee because the title had not been mutated. Mere execution of the sale deed and temporary receipt of sale proceeds did not establish ownership in the assessee for capital gains purposes. The arrangement was treated as legally effective, and taxing the same gain in the assessee's hands would result in double taxation.

Conclusion: The addition of long-term capital gains in the assessee's hands was deleted and the issue was decided in favour of the assessee.

Issue (ii): Whether interest paid on borrowings used to repay earlier business loans was allowable as a deduction.

Analysis: The borrowed funds were used to discharge earlier borrowings which had themselves been taken for business purposes. The expenditure therefore retained its business character, and the reason assigned by the lower authorities that the funds were used for dividend income was not accepted on the facts found.

Conclusion: The interest expenditure was held allowable and the disallowance was deleted in favour of the assessee.

Final Conclusion: The assessment additions on capital gains and interest were both set aside, and the assessee succeeded in full.

Ratio Decidendi: A bona fide family arrangement, when acted upon and recognized in the parties' conduct and accounts, is effective for tax purposes and a mere formal sale deed executed for convenience does not by itself fasten capital gains liability on the executant; interest on borrowings used to repay earlier business borrowings remains deductible.

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