Inocme-tax--

‑‑‑‑Reference‑‑‑Firm‑‑‑Assessment of partners‑‑‑Deductions‑‑‑Interest on borrowed capital‑‑‑Borrowings made in order to liquidate outstanding debts balance against partners in firm's account‑‑‑Dissolution of firm‑‑‑Borrowed money not utilised for purchase of shares of private limited company which ultimately took over firm‑‑‑No nexus established between borrowings and acquisition of shares‑‑‑Interest on borrowings could not be allowed either under S.57 or under S.67 as borrowings were utilised for making good debit balance in capital account of ‑partners in firm which stood dissolved‑‑‑No income from firm against which deduction could be allowed under S.67--‑No question of law arose‑‑‑Indian Income Tax Act, 1961.

The assessees were partners in a firm. Losses were incurred by the firm consistently from 1972 to 1980 and, therefore, the partners' accounts were debited with substantial amounts. The assessees borrowed money from others and deposited the same with the firm. The firm was dissolved and taken over by a private limited company in October, 1983. The private limited company was also one of the partners of the dissolved firm. In lieu of the assesses' interests in the firm, they were allotted shares by the private limited company. The interest pertaining to the loans was claimed by the assessees in their respective assessments for the years 1985‑86 to 1988‑89 as deduction. The claim was disallowed by the Assessing Officer for the reason that the interest which the assessees had incurred during the relevant assessment years was not relatable to the income earned during that year and it had no relation to the income declared by the assessees. The Deputy Commissioner (Appeals) accepted the contention of the assessees and allowed the appeals. On further appeal, the Tribunal held that the borrowings were made. in order to liquidate the outstanding debit balance against the partners in the firm's account. The Tribunal further held that nothing was available to the assessees which could be said to have been utilised in the purchase of shares in the private limited company which ultimately took over the firm in October, 1983. The Tribunal noted the fact that the firm made profits after 1980 and the capital accounts of the partners thereafter showed credit balance. The amount, invested out of the borrowings from April to August, 1980, had no bearing or nexus to the allotment of shares by the private limited company upon the takeover of the firm in which the assessees were partners. Therefore, the Tribunal held that the interest claimed by the assessees could not be allowed under section 57 nor could it be allowed under section 67 of the Income Tax Act, 1961, as the borrowings were utilised for the purpose of business of the firm which had become defunct and stood dissolved in October, 1983 and there was no income from the firm against which deduction could be allowed under section 67. On an application to direct reference:

Held, dismissing the application, that the Tribunal had found that the borrowed money invested from April to August, 1980, had no bearing or nexus to the allotment of shares boy the private limited company upon the takeover of the firm in which the assessees were partners, and that there was no nexus established between the borrowings and the acquisition of shares. The assessees had a duty and liability to make good the debit balance in their capital account which came about because of the accumulation of losses and the borrowed amounts were deposited in the firm in discharge of their liability. The Tribunal approached the question from the right perspective having due regard to the facts on record and even if a different inference could be drawn, that did not give rise to any question of law. The Tribunal was justified in holding that the interest could not be allowed as a deduction. No question of law arose from its order.

CIT v Rajendra Prasad Moody (1978) 115 ITR 519 (SC) distinguished.

C. Kodandaram for the Petitioners

S.R. Ashok for the Respondent.

JUDGMENT

P. VENKATARAMA REDDI, J.‑‑‑ In these applications under section 256(2) of the Income Tax Act, 1961, the assessees seek the reference of the following questions said to be questions of law arising out of identical orders of the Tribunal in I.T.As. Nos. 1236 to 1239 of 1991, dated March 21, 1994:‑‑

"(1) Whether on the facts and in the circumstances of the case, the Income‑tax Appellate Tribunal, Hyderabad, is correct in holding that the interest claimed by the assessee could not be allowed as deduction?

(2) Whether on the facts and in the circumstances of the case, the Income‑tax Appellate Tribunal is right in holding that the borrowed money invested from April to August, 1980 had no bearing or nexus to the allotment of shares by the private limited company upon the take‑over of the firm in which the assessee was a partner, and that there was no nexus established between the borrowings and the acquisition of the shares?

(3) Whether, on the facts and in the circumstances of the case, the Tribunal was correct in law in holding that the assessee had a duty and liability to make good the debit balance in his capital account which came about because of the accumulation of losses and that the borrowed amounts were deposited in the firm in discharge of his liability?"

The Tribunal rejected the reference applications on the ground that the decision of the Tribunal was based on appreciation of facts and no question of law arose; for consideration of this Court. The relevant facts are these:

The assessees were partners in Southern Engineering Works. Losses were incurred by the firm consistently from 1972 to 1980 and, therefore, the partners' accounts were debited with substantial amounts. For instance, the debit balance in the case of Sri K. Ramamohan Rao who is the petitioner in I. T. A. No. 1246 of 1995 was Rs.2,90,169 as on April 1, 1980. The assessees borrowed money from others and deposited the same with the firm. Sri Ramamohan Rao deposited a sum of Rs.2,99,000. The firm was dissolved and taken over by SEW Constructions (P.) Limited in October, 1983. The said company was also one of the partners of the dissolved firm. In lieu of the assessees interests in the firm, they were allotted shares by the private limited company. 'The interest pertaining to the loans was claimed by the petitioners assessees in their respective assessments for the years 1985‑86 to 1988‑89 as deduction. The claim was disallowed by the Assessing Officer for the reason that the interest which the assessees had incurred during the relevant assessment years was not relatable to the income earned during that year and it had no relation to the income declared by the assessees. The Deputy Commissioner (Appeals) accepted the contention and allowed the appeals. Hence, the Department filed the appeals in the Tribunal.

The Tribunal while allowing the departmental appeals found that the borrowings were made in order to liquidate the outstanding debit balance against the partners in the firm's account. The Tribunal further observed that nothing was available to the assessees which could be said to have been utilised in the purchase of shares in the private limited company which ultimately took over the firm in October, 1983. The Tribunal noted the fact that the firm made profits after 1980 and the capital accounts of the partners thereafter showed credit balance. It was observed:‑‑

"The amount invested out of the borrowings from April to August, 1980, had no bearing or nexus to the allotment of shares by the private limited company upon the take over of the firm in which the assessees were partners."

The Tribunal, therefore, held that the interest claimed by the assessees could not be allowed under section 57 of the Income‑tax Act nor can it be allowed under section 67 as the borrowings were utilised for the purpose of business of the firm which had become defunct and stood dissolved in October, 1983. There was no income from the firm against which deduction could be allowed under section 67. The Tribunal referred to various decisions of the Calcutta and Madras High Courts in support of its conclusion.

The contention of learned counsel for the assessee that the investment in the firm was not to make good the debit balance in t‑he capital accounts of the assessee was rejected by the Tribunal. The Tribunal having found that the amounts were utilised in discharge of the partners' liability, held that the same could not be said to be available for acquisition of shares on the dissolution of the firm. The decision of the Supreme Court in CIT v. Rajendra Prasad Moody (1978) 115 ITR 519, relied upon by the assessee's counsel was rightly distinguished by the Tribunal. It was pointed out that the ratio of the decision of the Supreme Court was that there need not be any income by way of dividends from the shares in the acquisition of which the borrowed money has been utilized in order to allow the deduction of the interest paid for the acquisition thereof and it would be sufficient if the borrowed amount is utilised for acquiring the shares.

In the case dealt with by the Supreme Court, the borrowed money was directly invested for the acquisition of shares whereas in the intstant case, the Tribunal found no nexus between the borrowings and the acquisition of shares. It seems to us that the argument advanced by learned counsel for the assessee before the Tribunal and reiterated before us‑‑‑that the amounts were invested in order to keep alive the firm which was ultimately taken over by the private limited company, and, therefore, the amounts invested are attributable to the acquisition of shares which yield income from other sources, is rather far‑fetched.

We cannot say that on the facts found and conclusions recorded by the Tribunal, any question of law arises for consideration of this Court. The Tribunal approached the question from the right perspective having due regard to the facts on record and even if a different inference can be possibly drawn, that does not give rise to any question of law which needs to be answered by the High Court. We, therefore, agree with the Tribunal that no question of law arises for consideration. The income‑tax cases are dismissed.

M.B.A./555/FC

Applications dismissed.