1979 (12) TMI 20

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....s. 3 lakhs. The assessee took over the liability to pay those loans and for that purpose necessary book entries were made by it in its accounts. It was in respect of those loans that the assessee claimed deduction of the aforesaid amount as interest paid to the creditors. The ITO did not accept the assessee's claim for which the main reason given was that the assessee itself had not utilized the borrowed capital in its business and as such the payment of interest being on behalf of a different person could not be treated as incidental to the carrying on of its business. The same view was taken on appeals by the AAC and the Appellate Tribunal, and now, at the instance of the assessee, the following question has been referred to this court fo....

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.... of interest allegedly paid by the assessee on the aforesaid loans could be treated as a legitimate deduction under s. 36(1)(iii) of the Act. The case of Mills Store Co. v. CIT [1971] 80 ITR 225 (Bom), on which reliance was placed by Dr. Bhatnagar, proceeded entirely on different facts and the ratio laid down therein would not have any application to the present case. In that case, a partnership firm constituted of six partners was carrying on business at Karachi with branches, amongst other places, at Bombay. At the end of March, 1948, that partnership was dissolved and the accounts were made up. As from 1st April, 1948, three of the six partners took over the Karachi business and continued it in the same name and the three remaining pa....

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....e off its outstanding claim against the Karachi firm as bad debt it simultaneously made a corresponding debit entry in the capital account of its partners maintained in its books of account. The subsequent making of this " havala entry" did not in anyway alter the original position of the creation of the credits in favour of the said creditors. It was emphasised that at the later point of time the partners were at liberty to withdraw the sum of Rs. 3,94,823 from their capital account and to advance it to the said creditors, who, in their turn, would have advanced the said amount to the assessee-firm.Such is exactly the effect of the debit to the partners' capital account and continuing the original credit in favour of the said creditors, su....