BADAL RAM LAXMI NARAIN versus C.I.T. LUCKNOW

Citation: [1991] 2 S.C.R. 920 · Decided: 12-07-1991 · Supreme Court of India · Bench: K. JAGANNATHA SHETTY · Disposal: Appeal(s) allowed
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Judgment (excerpt)

A 
BADAL RAM LAXMI NARAIN 
v. 
C.I.T. LUCKNOW 
JULY 12, 1991 
B 
[K. JAGANNATHA SHETTY AND YOGESHW AR DAY AL, JJ .] 
Income Tax Act, 1922: Section 36(J)(iii)-Computation of 
Income-Interest paid on borrowed capital-Deduction of-Partition 
of HUF business-Formation of partnership firm by members of 
HUF-Take over of HUF business and debit balance-Whether interest 
C paid on debit balance an allowable deduction. 
The partners of the assessee-firm were members of a HUF, which 
was carrying on business with borrowed capital. Consequent on partial 
partition in the family and partition of the family business, the 
members formed ·the assessee-firm. There was a debit balance in the 
D capital account of the family which was transferred to the personal 
accounts of the partners of the firm. The firm, which continued the 
family business and took over the business assets and the liabilities of 
the HUF, claimed that the interest paid on the debit balance was an 
allowable deduction in the computation of income since it had taken 
over the debit balance in consideration of the goodwill of the business. 
The Appellate Assistant Commissioner held that the HUF business had 
E no goodwill. On appeal, the Tribunal held that the HUF had a very 
long-standing and flourishing business, and hence the firm could be 
deemed to have taken over the liability in consideration of the sale of 
goodwill and the interest paid thereon was an allowable deduction. 
F 
G 
H 
On a reference made by the Tribunal the High Court held that the 
goodwill of the HUF business was never sold or purchased, and that the 
partners of the firm were bonnd to take over the HUF's liability, since it 
was that of the family of which they were members, and became liable 
to discharge their share of the debt. 
Allowing the appeals preferred by the assessee, this Conrt 
HELD: 1.1 Clause (iii) of Section 36(1) of the Income Tax Act, 
1922 applies only where capital has been borrowed for the purposes of 
the business or profession. The amount of interest paid on the borrowed 
capital is an allowable deduction. It cannot be disputed that if the 
goodwill is purchased out of the borrowed capital, the interest paid on 
the borrowed capital is an allowable deduction. [923B] 
920 
BADAL RAM v. C.I.T. !SHETTY, J .] 
921 
1.2 In the instant case, there was only a partial partition in the 
A 
family, particularly with regard to HUF business and it was not neces-
sary for the firm to have taken over the debit balance of the HUF, since 
the HUF had other properties, [9230] 
1.3 The Tribunal has corelated the debit balance to the purchase 
of goodwill since the fmn had taken over the business. The High Court 
has held that there was no sale of goodwill by the HUF to the rmn in 
view of the absence of related entries in the books of account of HUF. 
The conclusion of the High Court is as much an inference as that the 
B 
·"" 
Tribunal on the same set of facts and circumstances. The Tribunal was 
right in holding that the fmn had taken over the debit balance in con-
sideration of the sale of the goodwill and this conclusion is neither 
C 
unreasonable or unwarranted, nor arbitrary or unjust. The High Court 
ought not to interfere with such conclusion even if another view is 
possible. Besides, the relevant point to be considered is the rights of the 
assessee and not the liability of the individual members of the HUF. The 
claim of the assessee for allowable deduction of the interest paid cannot 
D 
be defeated by the existence of personal liability of the members of 
HUF. [923C, E, F] 
CIVIL APPELLATE JURISDICTION: Civil Appeal Nos. 657 
of 1979 & 2117-21of1977. 
From the Judgment and Order dated 20.1.1978 & 6.5.1976 of 
Allahabad High Court in Income Tax Rule No. 502/74 and Income 
Tax Reference No. 827 of 1973. 
S.B.L. Srivastava, Manoj Swarup and Lalita Kohli for the 
Appellants. 
J. Ram Murthy, K.P. Bhatnagar and Ms. A. Subhashini for the 
Respondent. 
The Judgment of the Court was delivered by 
K. JAGANNATHA SHETTY, J. The common question which 
arises for decision in these appeals by special leave is whether the 
interest paid on a debit balance of Rs.1,75,310 taken over by the 
assessee firm from the erstwhile Hindu Undivided Family (HUF), 
would be an allowable deduction under Section 36(1) (iii) of the 
E 
F 
G 
Income Tax Act, 1922. 
H 
A 
B 
c 
D 
922 
SUPREME COURT REPORTS 
[1991] 2 S.C.R. 
The partners of the firm were members of the HUF which car-
ried on business at
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