Interest on takeover debit balance treated as deductible business expenditure where liability formed part of goodwill acquisition.

Interest paid on a debit balance taken over by a successor firm from an erstwhile Hindu undivided family was allowable as a deduction under section 36(1)(iii) of the Income-tax Act, 1922, where the Tribunal reasonably inferred on the surrounding facts that the liability formed part of the consideration for acquiring the business goodwill. The absence of book entries did not, by itself, justify disturbing that finding. The firm's deduction claim was not defeated by the personal liability of the Hindu undivided family members, because the relevant question was the assessee-firm's own entitlement to deduction. The deduction was therefore allowed in favour of the assessee.

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Issues: Whether the interest paid on the debit balance of Rs. 1,75,310 taken over by the assessee-firm from the erstwhile Hindu undivided family was allowable as a deduction under section 36(1)(iii) of the Income-tax Act, 1922.

Analysis: The deduction was claimed on the footing that the debit balance had been taken over in consideration of the goodwill of the business. The Tribunal accepted that the business was a running concern of long standing and inferred from the surrounding circumstances that the liability had been assumed as part of the purchase of goodwill. The High Court rejected that inference, but the Court held that the Tribunal's conclusion was a reasonable one on the facts and that the absence of book entries did not warrant interference. The Court further held that the assessee's claim could not be defeated by the personal liability of the members of the Hindu undivided family, because the issue was the assessee-firm's entitlement to deduction.

Conclusion: The interest paid on the debit balance was an allowable deduction and the answer was in favour of the assessee.

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