Income-tax is levied on income, not on hypothetical entries in the books of account.

J.V.Gupta, J.

1. At the instance of the Revenue, the following two questions have been referred by the Income-tax Appellate Tribunal, Amritsar Bench (hereinafter called the "Tribunal"), under Section 256(1) of the I.T. Act, 1961, vide its order dated March 18, 1976 :

"1. Whether, on the facts and in the circumstances of the case, the expenditure of Rs. 83,691 by way payment of interest by the assessee to the Kapoor group, was an admissible deduction under Section 37 of the Income-tax Act, 1961 ?

2. Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the sum of Rs. 50,044 was a notional receipt and hence was not liable to be assessed in the hands of the assessee during the assessment year 1970-71 ?"

2. The brief facts giving rise to these questions are these. The asses-see-firm known as M/s. N. D. Radha Kishan & Co., Pathankot, runs a fleet of passenger buses. This firm was formely constituted by two groups, namely, Kapoor group and Sethi group. A civil suit was filed by the Kapoor group in the High Court of Jammu and Kashmir against the Sethi group in the year 1968 for the rendition of accounts and dissolution of the firm. The High Court passed a preliminary decree for dissolution of the partnership and rendition of accounts, vide order dated March 3, 1969. In pursuance of the preliminary decree, a Commissioner was proposed to be appointed to go into the accounts of the dissolved partnership to enable the court to pass a final decree in the case. At that stage, a compromise was arrived at between the parties and by virtue of a compromise deed, dated April 21, 1969, it was agreed that a sum of Rs. 9,47,500 would be paid by the defendants (Sethi group) to the plaintiffs (Kapoor group) and that the defendants would be liable to pay interest on this amount at 15 per cent. per annum. Clause (iv) of the said compromise deed reads as under :

"That the remaining amount of Rs. 9,47,500 will be paid by defendants (Sethi group), in the proportions mentioned below. The defendants will be liable to pay interest on this amount at 15 per cent. per annum with quarterly rests."

3. A sum of Rs. 63,691 was paid by way of interest by the newly constituted firm (which came into existence as a result of the partnership deed dated March 13, 1970), that is, the assessee, and the same was claimed as admissible deduction under Section 37 of the Act. The ITO disallowed the said claim on the ground that this liability was to be borne by the Sethi group and not by the newly constituted firm.

4. On appeal before the AAC, the assessees submitted that since all the assets and liabilities of the erstwhile firm were taken over by the newly constituted firm and its partners had acknowledged the liability pertaining to the Sethi group, the claim for interest should be fully allowed in the assessment of the firm. It was also pointed out that the amount of interest paid to the outgoing partners was debited to the individual partners account in view of the fact that all the new partners had duly acknowledged the liability of Rs. 9,47,500 and interest thereon, which was payable to the Kapoor group. The AAC accepted the claim of the assessee and deleted the addition of Rs. 83,691 made by the ITO.

5. Aggrieved against the order of the AAC, the Revenue filed an appeal before the Tribunal. The order of the AAC was upheld by the Tribunal and it was held-:

"After hearing the learned representatives of the parties and going through the records, we are of the opinion that the Department has no case. We have gone through the partnership deed dated 13-3-70, executed by the partners of the newly constituted firm and find from the preamble and Clause (ii) of the said partnership deed that the new firm took over the business of the erstwhile firm with effect from 1-4-69 as a going concern and all the present partners of the newly constituted firm had accepted the liability in respect of the old firm. Thus, the liability