Decided on July 18,1962



V.S.DESAI J. - (1.)THE question referred to us on this reference under S. 66(1) of the Indian IT Act arises out of the assessments made on the original assessee, Mathuradas Canjee Matani, who has died during the tendency of the reference and is represented by his heirs and legal representatives, relating to the asst. yrs. 1955 -56, 1956 -57 and 1957 -58, the previous years for which were Samvat Years 2010, 2011 and 2012. The assessee was carrying on business in kirana goods under the name and style of M/s Canjee Dwarkadas as its sole proprietor till the end of the Samvat Year 2005, i.e., till 21st Oct., 1949. In the year 1944 he purchased a property at Waudby Road for a sum of Rs. 3,70,000.
(2.)AS the funds for the said property came out of the business, he opened an account in his books of account in the name of "Waudby Road Property Account" and debited the purchase price to that account. In the same year, it appears, the assessee made an arrangement to take an overdraft from the Central Bank of India limited and for the purpose of securing the said overdraft, he created an equitable mortgage on the Waudby Road property by depositing the title deeds with the bank. From the beginning of Samvat Year 2006, i.e., from 22nd Oct., 1949, the assessee took his three sons into partnership with him and converted his proprietary business into a business of the partnership of himself and his three sons. But even after the constitution of the firm, the overdraft arrangement with the Central Bank of India Ltd. continued as before. On the 15th of November, 1951, the assessee made a declaration to the bank that the Waudby Road property belonged to him absolutely; that it was not encumbered in any way; that it was not the subject -matter of any litigation and there was no notice from the municipality or local body for acquisition, set back or repairs in respect of the property nd that all municipal and ground rent bills etc., in respect of the property had been paid and there was no arrear in respect thereof. He further stated that he was making the said declaration knowing that in the faith thereof in believing the same to be true, the bank would grant the firm of M/s Canjee Dwarkadas overdraft facility applied for by him. On the 17th Nov., 1951, the assessee also wrote a letter to the Central Bank of India informing it that he had opened a new current account since he had taken his three sons in partnership with him in business and requesting it to assign the limit of the overdraft to the new account. He also informed the bank that the debit balance in his personal overdraft account and the security held therein should also be transferred to the new account. On the same day all the four partners of the partnership firm also wrote a letter to the bank informing it that they were partners of the firm "Canjee Dwarkadas" and that they were jointly and severally responsible to the bank for the liabilities of the firm with the bank and the bank would be entitled to recover its claims from the estate of any or all of the partners of the firm.
Now, in the firm's account after its commencement there were more than one account of the assessee. One of them was the "Waudby Road Property Account" and another in which the assessee's yearly profit or loss was adjusted as also his yearly drawings, and which may be called the capital account. At the end of Samvat Year 2009 up to which time these two separate accounts continued, there was a debit balance of Rs. 2,91,257 in the property account whereas there was a credit balance of Rs. 88,699 in the capital account. During the four years of Samvat Years 2006 to 2009 no interest had been charged to the assessee in respect of the debit balance in the property account. Nor was any interest credited to him in respect of the credit balance in the capital account.

(3.)BY the end of Samvat year 2009, the position of the overdraft account with the Central Bank of India was that it disclosed a deposit of Rs. 30,152 to the credit of the firm. From the commencement of Samvat Year 2010, i.e., from 7th Nov., 1953, the two separate accounts of the assessee in the firm's account books were merged and converted into a single account. Thus, for all the three years with which we are concerned in the present case, viz., Samvat Years 2010, 2011 and 2012, there was only one account of the assessee in the firm. This account showed at the end of Samvat Year 2010 a debit balance of Rs. 2,44,439, at the end of Samvat year 2011 a debit balance of Rs. 2,73,740 and at the end of Samvat Year 2012 a debit balance of Rs. 3,16,826. The position of the firm in its overdraft account with the Central Bank of India at the end of each of these three years was as follows:
Although, as we have stated, no interest was charged by the firm to the assessee in the years prior to Samvat years 2010, for these years interest was charged at 4= per cent for the Samvat year 2010 and at 6 per cent for the following two years. On the overdraft of the bank was all along paying interest at 6 per cent. The position of the interest charged by the firm to the assessee and the interest charged by the bank to the firms was as follows :

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