R.C.MANKAD, J. - (1.) THE assessee is a partnership firm consisting of four partners. We are concerned with the assessment year 1973 -74 for which the accounting period is Samvat year 2028. Four partners of the assessee -firm obtained loan of Rs. 10,000 each in their individual names from the Surat People's Co -operative Bank and the aggregate amount of Rs. 40,000 so borrowed by the partners was transferred on that very day to the assessee -firm to the credit of an account called the 'Surat People's Co -operative Bank Loan Account'. In the course of assessment for the assessment year 1973 -74, the assessee -firm claimed that the amount borrowed from the bank on the money borrowed should not be disallowed under section 40(b) of the Income -tax Act, 1961 ('the Act'). The Income -tax Officer did not accept the claim of the assessee -firm and held that the transaction of loan had taken place between each partner and the bank and, on the transfer of the amount borrowed to the assessee -firm, the capital of the partners stood raised. The Income -tax Officer, therefore, held that the interest of Rs. 3,496 paid to the bank was required to be added back under section 40(b). The assessee having failed in appeal before the Appellate Assistant Commissioner went in further appeal to the Tribunal. The Tribunal, following its earlier decisions, held to the effect that the partners of the assessee -firm had acted as intermediaries or a conduit pipe to obtain loan for the purpose of the business of the assessee -firm and that, in substance, the amount borrowed from the partners should be regarded as moneys borrowed by the assessee -firm for the purpose of its own business. In this view of the matter, the Tribunal allowed deduction of the interest paid to the bank. In the background of the above facts, the following question has been referred to us for our opinion : 'Whether, on the facts and in the circumstances of the case, the interest of Rs. 3,496 on the aggregate amount of Rs. 40,000 as borrowed by partners and transferred to the assessee -firm to the credit of an account called the 'Surat People's Co -operative Bank Loan Account' cannot be added back under the provisions of section 40(b) of the Income -tax Act, 1961, as held by the Appellate Tribunal ?'
(2.) THERE is a clear finding of the Tribunal to the effect that it was the assessee -firm which had borrowed money for the purpose of its business through its four partners who had acted clearly as intermediaries or a conduit pipe to obtain loan for and on behalf of the assessee -firm. The Tribunal had held that, in substance, the amount was borrowed by the assessee -firm for its business. There is no reason or justification to disturb this finding of fact recorded by the Tribunal. It, thus, becomes clear that the interest in question has not been paid to the partners but to the bank. Once this position becomes clear, the interest paid to the bank could not have been disallowed under section 40(b). Mr. M. J. Thakore, learned counsel for the Revenue, however, strongly relied upon the decision of the Punjab and Haryana High Court in CIT v. Agra Tannery in support of the Revenue's contention that the interest paid to the bank could not have been allowed as a deduction under section 40(b). That was a case in which the partners of the assessee -firm took loan from the Life Insurance Corporation. The amounts taken as loans were credited to the respective capital accounts of the partners. The assessee -firm paid interest on these loans to the Life Insurance Corporation and claimed it as deduction. The Income -tax Officer disallowed deduction of the interest paid to the Life Insurance Corporation and his decision was confirmed in appeal by the Appellate Assistant Commissioner. On further appeal, however, the Tribunal held that the disallowance was not justified. The Division Bench of the Punjab and Haryana High Court, while reversing the decision of the Tribunal, observed that the amount that was taken as loan by the partners from the Life Insurance Corporation was credited not to the account of the Life Insurance Corporation but to the capital account of the respective partners. It was in view of this fact that the Division Bench held that the interest paid by the firm to the Life Insurance Corporation was, in fact, interest paid to the partners and the provisions of section 40(b) were clearly attracted. Such is not the case here. In the instant case, the amount of the loans taken by the partners and the has been transferred to the bank's account and interest on the amounts borrowed was paid directly to the bank. Apart from that, there is a clear finding of fact to the effect that it was the assessee -firm which had borrowed money from the bank through its partners. Since it was the assessee -firm which had borrowed money for the purpose of its business, the interest paid to the bank could not have been disallowed as deduction under section 40(b). We, therefore, agree withe the view taken by the Tribunal and answer the question which is referred to us in the affirmative and against the Revenue.
(3.) THE reference shall stand disposed of accordingly with no order as to costs.;