Interest paid on debit balance attributable to share in firm's loss is an allowable deduction, while interest paid on debit balance due to personal drawings is not.

BIMAL CHANDRA BASAK, J.

( 1 ) THIS arises out of a reference made by the Tribunal under Section 256 (1) of the I. T. Act, 1961 (hereinafter referred to as " the Act " ). The admitted and/or undisputed facts are as follows :

( 2 ) THE assessment year is 1965-66. The assessee claimed a deduction of interest amounting to Rs. 22,533 paid to the firm of M/s. Soorajmall Nagar-mull (hereinafter referred to as the firm ). The assessee was a partner of the said firm. In the assessee's personal account in the books of M/s. Soorajmull Nagarmull there was a debit balance. This debit balance was on account of drawings for personal expenses of the assessee and also due to the losses incurred by the firm and the apportionment of such losses to the account of the assessee. Interest was charged by the firm on this debit balance which came to Rs. 22,533. The assessee claimed deduction in respect of this interest charged. The ITO disallowed the claim. It was stated that in the last assessment that such debit balance comprising of business losses and personal drawings represented the personal liabilities, and the interest payable on such personal liabilities was not allowable against the income earned under any of the taxable heads. The ITO did not find any reason to deviate from the findings of the last year.

( 3 ) BEING aggrieved by the same, the assessee preferred an appeal before the AAC. The AAC rejected the claim of the appellant. It was stated that the interest had been paid on a debit balance which consisted mainly of the drawings for personal purposes.

( 4 ) THEREAFTER, the assessee preferred an appeal before the Tribunal. The Tribunal found that the interest was charged on the debit balances which were built up, partly due to the drawings for personal expenses and partly due to the losses incurred by the firm and the apportionment of such losses to the account of the assessee. The Tribunal held that the interest attributable to the portion of the debit balance relating to the loss of the firm would be an admissible deduction as the interest had to be paid for continuing to earn the share income from the firm. The Tribunal directed the ITO to allow such interest as an allowable deduction. However^ the Tribunal held that the interest charged on the debit balance, due to the drawings made by the assessee for personal expenses, was not an admissible deduction. Accordingly, the disallowance to that extent was upheld by the Tribunal.

( 5 ) ON the above facts, 'the following questions of law were referred to the High Court under Section 256 (1) of the Act. "1. Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the interest paid on the portion of the debit balance in the capital account of the assessee maintained in the books of the firm of Surajmull Nagarmull attributable to the assessee's share in the loss of the said firm is an allowable deduction in computing the assessee's share income from the said firm ?2. Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the assessee can urge in the appeal before the Appellate Assistant Commissioner, the ground relating to the levy of interest under sections 139 and 215 ?3. Whether, on the facts and in the circumstances of the case and on a correct interpretation of section 26 of the Income-tax Act, 1961, thd Tribunal was right in holding that the shares of the assessee in the income from the jointly owned property computed in accordance with sections 22 to 25 of the Income-tax Act, 1961, shall, for the purpose of inclusion in his total income, be subject to further relief of statutory allowance under section 23 (2) of the Income-tax Act, 1961 ?"

( 6 ) SO far as the first question is concerned, Mr. Ajit Sengupta, learned counsel appearing on behalf of the Revenue, has made a three-fold submission. Firstly, he has submitted that the interest paid was in respect of a withdrawal by the assessee, and,

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