GULATI,J. - (1.) In compliance with the direction of this Court, the Tribunal, Allahabad, has submitted along with the statement of the following question of law :- "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 HUF ?" An HUF carried on business at Varanasi in the name of Badal Ram Laxmi Narain. The family had no capital of its own and had been running business with the help of borrowed money. On 30th Oct., 1951 there was a 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 a partnership and continued the business. On the date of the partition there was a debit balance of Rs. 1,75,310 in the capital account of the family. This debit balance was transferred in equal proportion to the personal accounts of the three partners of the firm, who were members of erstwhile family. The newly formed firm took over the business as a going cencern, which means that it took over the assets as well as the liabilities of the HUF. The debt of Rs. 1,75,310 was also taken over by the firm. It appears that the firm borrowed further capital and it also suffered losses in subsequent years so that their debit balances increased. The question arose as to whether the interest paid by the firm on the debit balance taken by the erstwhile firm was an allowable deduction in the computation of its income.
(2.) NOW , interest can be allowed on money borrowed for purposes of business. The Tribunal has recorded a finding that the debit balance of Rs. 1,75,310 in the books of accounts of the family represented borrowings for non-business purposes such as demand of income-tax and personal expenses of the members. Thus interest on this amount could not have been allowed as deduction to the family. The nature of the debt did not change when it was taken over by the firm and hence the interest paid by the firm on the debit balance could not be allowed as a deduction. An alternative plea was raised before the Tribunal that the sum of Rs. 1,75,310 may be considered to be the price paid by the firm for the good-will of the business.
(3.) NOW , there can be no manner of doubt that, if a business man borrows money in order to acquire goodwill of a business, the interest payable thereon would be an allowable deduction. But what is to be seen is whether such a thing had happened in the instant case, namely, whether the firm purchased any goodwill from the family. This was not the case of the assessee at all. The goodwill of the HUF, in case, it had any, was never sold or purchased. In fact there could have been no such transaction, because the persons to whom the goodwill belonged were the same who ultimately took it over although in different capacity. Had there been any such transaction, appropriate entries in the books of accounts would have been made. The HUF should have credited the amount in its books as consideration for good-will and the firm would have also appropriate accounts made in its accounts in respect of the price it paid for the good will. Admittedly no such entries were passed.;