K. Jagannatha Shetty, J. - (1.) The common question which arises for decision in these appeals by special leave is whether the .interest paid on a debit balance of Rupees 1,75,310/- taken over by the assessee firm from the erstwhile Hindu Undivided Family (HUF), would be an allowable deduction under S. 36(1)(iii) of the Income-tax Act, 1922. . ,
(2.) The partners of the firm were members of the HUF which carried on business at Varanasi in the name of M/s. Badal Ram Laxmi Narain. The family had no capital of its own and had been running business with the help of borrowed money. On 20 October 1951, there was partial partition in the family. As a result whereof the business of the family was partitioned between the members of the family. The members formed themselves into partnership and continued the same business. On the date of partition, there was a debit balance of Rs. 1,75,310/- in the capital account of the family. This debit balance transferred in equal proportion to the personal accounts of the three partners of the firm. The newly formed firm took over the business assets as well as liabilities of the HUF. The question arose as to whether the interest paid by the firm on the said debit balance was an allowable deduction in the computation of its income One of the contentions urged for the firm was that the debit balance was taken over by the firm in consideration of the goodwill of the business. The Appellate Assistant Commissioner has held that the HUF business had no goodwill. The Tribunal did not agree with the Appellate Assistant Commissioner. It has observed that the business of the HUF was of a very long standing and the previous years returns and assessment of income prior to the date of partition indicated that the HUF had flourishing business. Since the running business was taken over by the assessee with the debit balance, the Tribunal expressed the view that the firm could be deemed to have taken the liability of Rs. 1,75,310/- in consideration of the sale of goodwill and the interest paid thereon was an allowable deduction.
(3.) The following question of law was referred to the High Court. "Whether on the facts and in the circumstances of the case, the assessee was entitled to the deduction of interest on a debit balance of Rs. 1,75,310/- taken over from the erstwhile Hindu Undivided Family - ;