In order to claim a deduction under Section 24(1)(vi) of the Income-tax Act, 1961, there must be a relationship of borrower and lender between the assessee and the person from whom the capital is borrowed.

Ashok Bhan, J.

1. At the instance of the Revenue, the Income-tax Appellate Tribunal, Amritsar (hereinafter referred to as "the Tribunal"), has referred the following question of law to this court for its opinion :

"Whether, on the facts and in the circumstances of the case, the Appellate Tribunal is right in law in holding that the assessee is entitled to the deduction of interest of Rs. 13,358 under Section 24(1)(vi) of the Income-tax Act, 1961 ?"

2. The dispute pertains to the assessment year 1978-79. The assessee, a private limited company, was a partner in the firm, Four Fields Poultry Products, Amritsar. The partnership stood dissolved with effect from July 1, 1975, by a dissolution deed of the same date. The assessee-company took over the entire business of Four Fields Poultry Products along with all its assets and liabilities. The value of the assets acquired was Rs. 3,09,521. As on July 1, 1975, the account of the assessee in the books of the Four Fields Poultry Products showed a credit balance of Rs. 1,24,785.02. There were four other partners, namely, Jagdish Chander Mehra, Jugal Kishore Mehra, Jai Gopal Mehra and Joginder Lal Mehra. Each of them had credit balances of Rs. 42,000 to Rs. 48,000 in the aforesaid firm. The assessee having been permitted to take over the business of Four Fields Poultry Products along with all its assets and liabilities, was required to make payment of Rs. 1,82,037 in aggregate to all the partners in the settlement of the dues upon the dissolution of the firm. The dissolution deed provided that if the assessee was able to clear the liability of the outgoing partners by December 31, 1976, no interest was to be charged but if it was not able to clear the liability till that date interest at the rate of 15 per cent. per annum was to be charged. One of the assets taken over by the assessee comprised a building, the value of which was shown in the balance-sheet at Rs. 2,16,973 as on June 30, 1975. This was a tenanted property and fetched a rent of Rs. 30,000 per annum, the profit and loss of the assessee for the year concerned showed a sum of Rs. 24,000 on the credit side as rent receipt. Proceeding on this basis, the Income-tax Officer assessed the income derived from the property at Rs. 19,634 and included the same in the total income of the assessee. The assessee made a claim that Rs. 13,358 payable as interest on the borrowed capital to the erstwhile partners of the Four Fields Poultry Products should be allowed as interest payable on borrowed capital. The Income-tax Officer did not accept the plea of the assessee and disallowed the claim of interest against the income derived from the property. According to him, the property had not been acquired with any borrowed capital and, therefore, the question of allowing any interest on the borrowed capital did not arise. The assessee disputed this view of the matter by claiming that the building which had been subjected to assessment by the Income-tax Officer formed part of the business of Four Fields Poultry Products and, therefore, the interest on the liability credited in favour of the outgoing partners should be considered as interest paid on the borrowed capital. The assessee became entitled to the building and obtained the ownership only because it had made itself liable to the outgoing partners for a sum of Rs. 1,82,037. But the Income-tax Officer did not accept this plea of the assessee and turned down its request for allowing deduction of interest from the income derived from the property. The order of the Income-tax Officer was upheld by the Commissioner of Income-tax (Appeals).

3. Aggrieved against the rejection of his appeal by the Commissioner of Income-tax (Appeals), the assessee approached the Tribunal, by way of second appeal. The Tribunal, after consideration of facts and relying upon a judgment of this court in CIT v. N. D. Radha Kishan and Co. [1983] 140 ITR 860, accepted the appeal and allowed the claim of the assessee