The Judgment of the Court was delivered by

Srinivasan, J.:— M.R Shah and P.R Shah are the two partners in the firm of Roopchand Chabildass and Sons. The firm was carrying on a business in the manufacture and sale of wheat and gram products, besides doing money-lending business. In the Samvat year 2010, the flour mills business of the firm was transferred to a limited company. Each partner invested in the shares of this company, and for the purpose of doing so, they were financed through their drawings account with the firm. The firm had made heavy borrowings upon which it had paid interest in the Samvat years 2011 and 2012. Its borrowings during these two years amounted Rs. 12,50,000 and Rs. 11,00,000 roughly. During these years, P.R Shah had taken advances to the tune of Rs. 3,30,000 and Rs. 4,26,000 and odd, and M.R Shah had similarly taken advances of Rs. 1,50,000 and Rs. 2,50,000 roughly. In addition to this, the firm had also paid income-tax on behalf of the partners. In the course of the assessment proceedings of the firm for the year 1957-58 the relevant account year being the Samvat year 2012, between November 15, 1955, and November 2, 1956, it was found that while the firm had paid interest of nearly a lakh of rupees on the amounts borrowed by it, it had not charged interest on the accounts of the partners to whom it had advanced the moneys. Equally, the firm had made advances to another firm known as the Sangli firm to the tune of Rs. 1,28,000 and odd, upon which also it had not purported to recover any interest. In explanation of the situation, the firm stated that the advances to the Sangli firm were in the course of the business, and that the amounts drawn by the two partners from the drawing account were invested by them in the acquisition of shares, properties, etc., the income from which was subjected to tax in their hands. It was further claimed that the income-tax advances to the two partners could not be treated as personal drawings. But, what this explanation really meant is not quite clear. Now, it appears that the two partners were also partners in the Sangli firm. The Sangli firm was wound up in 1948. The Income-tax Officer held that in so far as the advances to the partners were concerned, it could not be said that the firm had advanced monies for the purpose of its business. Equally, the payment of the income-tax liabilities of the partners out of the assets of the firm was debitable only to the personal accounts of the partners, and such payments could not be said to be in the course of the business of the firm, He, however, took the view that since 75 per cent. of the borrowings of the firm were so locked up in advances, which did not represent a business activity of the firm, only proportionate interest on the borrowals of the firm could be allowed. Accordingly, as against Rs. 95,300 claimed as interest payments on borrowed capital in the assessment of the firm, he disallowed a sum of Rs. 71,500.

2. The two partners in their individual assessments claimed that if the interest payment by the firm was disallowed to any extent, since the moneys withdrawn had been used for the purpose of investment in shares and properties, the income from which was being assessed to tax in the hands of the individual partners, the interest on such amounts as were taken from the firm by the partners should be allowed in their assessments.

3. This contention was shortly met by the Income-tax Officer by pointing out that even assuming that the advances taken from the firm represented borrowed capital and had been invested by the partners in the manner indicated, the individual assessee would be entitled to allowance only if he had paid interest on the borrowed capital. That not being the case, no question of allowance under this head arose.

4. The appeals by the firm and the partners to the Appellate Assistant Commissioner failed. Before the Appellate Assistant Commissioner, it was urged that since the firm represented nothing more than the group of the partners, even if the disallowance in the assessment of the firm was justified, it could yet be granted in the assessments of the individual partners. The Appellate Assistant Commissioner rejected this argument as, in the eye of the Income-tax Act, the firm represented an entity different from the partners. Further appeals were carried to the Income-tax Appellate Tribunal. The Appellate Tribunal accepted as correct the view taken by the department that the bulk of the borrowings was utilised for purposes other than that of the business of the firm, so that the disallowance in the firm's assessment was upheld. In the case of the partners' assessments, the Tribunal pointed out that even the acquisition of properties by the partners and the payment of income-tax on the income from those properties or investments did not accrue to the benefit of the firm, and unless such a result could be postulated, the interest payment by the firm on its borrowings could not be allowed in the computation of the individual income of the partners.

5. Applications by the firm and the two individual partners under section 66(1) of the Act being rejected, this court directed the Tribunal to state a case under section 66(2) of the Act and accordingly the following questions stand referred to us:

“1. Whether, on the facts and circumstances of the case, the disallowance of interest payment of Rs. 71,500 or any part thereof in the assessment of the firm was right in law?

2. Whether the sum of Rs. 71,500 paid by the firm towards interest or any part thereof is allowable as a deduction under section 10(2)(iii) in the assessment of the individual partners?”

6. It was apparently not in dispute that though the firm was doing some kind of money-lending business, it had ceased to do that business during the relevant account year. The only debt outstanding which could be called a money-lending was the advance made to the Sangli firm. In this Sangli firm the two partners of the assessee-firm were the major partners, with a third person as a working partner with a one-anna share. Though in law the Sangli firm was a different entity from the assessee-firm, for all practical purposes, it was nothing more than the alter ego of the-assessee-firm. We may however take it that the advances made to the Sangli firm represented a money-lending transaction. It was also not in dispute that the Sangli firm was wound up in 1948 and that there was no prospect of the assessee-firm realising any portion of its advances from that firm. If the advance to the Sangli firm represented a money-lending transaction of this firm, it is obviously in the course of its business that the advance was made. To that extent, undoubtedly, the assessee-firm is entitled to say that the moneys it itself had borrowed was for the purpose of its money-lending business, and if it paid interest on its borrowings, notwithstanding that it was not able to recover any interest from the Sangli firm, it would yet be entitled to ask for an allowance of the interest on the capital borrowed for the purpose of its business. The question, however, is whether the advances made to the partners represented money-lending transactions so as to bring them within the ambit of the business of the assessee-firm; that is to say, would it be proper to say that the borrowings made by the assessee-firm were for the purpose of the business when the only purpose for which the borrowing was utilised was to make interest-free advances to its own partners. Mr. S. Narayanaswami, learned counsel for the petitioners in these cases, argues that the question of allowance of interest under section 10(2)(iii) of the Act has to be considered in the light of the circumstances prevailing at the time the borrowing was made by the firm and not by the subsequent use to which it was put. In support of this contention, M/S. L.R Brothers…Applicant; v. The Commr. Of Income Tax…Opposite Party. 1928 3 I.T.C 209. has been cited. In that case, the assessee-firm was carrying on a banking business with borrowed money. It was also running a separate piece-goods business and advances were made to that business. This piece-goods business was closed and loss resulted of the sums invested therein. The claim was made by the assessee-firm that it was entitled to deduct the interest paid on that part of the capital employed in the piece-goods business. This was disallowed, the view taken by the lower authorities being that since the sums so advanced had been lost in the previous year, they were no longer available as capital of any business done by the firm in the account year. The learned judges took the view that it could not be regarded that there were two separate and distinct businesses. They accepted the position that money was borrowed for the purposes of the business and was employed in the business until it was lost. They say:

“Nevertheless, interest had to be paid on it and the test seems to us to be not whether it continued to be available for the purposes of the business during the year of assessment, but whether it was in its origin money borrowed as capital for the assessees' business and whether interest was in fact paid on that borrowed capital, (existing or lost) during the year of assessment.”

7. Relying upon this passage, the learned counsel urges that since the firm had borrowed moneys to the tune of Rs. 12,00,000 for the purpose of its business and paid interest on it, whatever might have been done with the sum so borrowed, the interest paid upon it is allowable as a deduction. It seems to us that these observations cannot possibly be carried to the length of supporting the interpretation placed upon them by the learned counsel. The real ratio of the decision is that when money borrowed was in fact utilised for the purpose of the business, but it had become lost at some point of time, in the succeeding year of assessment, the interest paid on the borrowed capital was still liable to be deducted under section 10(2)(iii), notwithstanding that in the relevant account year the money was not available for the purposes of the business. What this decision really emphasises is that the money should have been borrowed for the purposes of the business, that the needs of the business required such borrowal and that it was in fact utilised for the purposes of the business at some point of time that is apparent in the facts of the decision cited. It is obviously impossible to apply this decision to a case where money is borrowed but never utilised for the purposes of the business except to a small extent and never even intended to be used for the purpose of the business. Whether money was borrowed for the purpose of the business or not can only be ascertained by examining the use to which the money was put. It is not the mere stated but unfulfilled purpose that justifies the deduction under section 10(2)(iii).

8. Mr. Balasubrahmanyan, learned counsel for the department, suggested that the decision cited above was not accepted as correct in a later decision, South Indian Industrials Ltd. v. Commissioner of Income-tax. That was a case where the assessee-company was carrying on several businesses, one of its objects being to acquire and hold shares in other companies carrying on similar business. The company so purchased a large number of shares. Against the income derived by way of dividends from these shares, the company claimed to set off the loss alleged to have been sustained in the other businesses it was carrying on. It was, however, found that even four years prior to the account year in question, the company had ceased to carry on those other businesses but continued only to hold the shares referred to. On a reference, this court held that the various concerns acquired by the company were separate businesses, and that section 10 of the Act only dealt with the businesses that were being carried on, and not with businesses which had ceased to be carried on. This decision does not directly apply, for it was a case of set-off governed by section 24 of the Indian Income-tax Act. Mr. Balasubrahmanyan points out that Beasely C.J, who was a member of the Bench which decided M/S. L.R Brothers…Applicant; v. The Commr. Of Income Tax…Opposite Party. 1928 3 I.T.C 209. and who was also a member of the Bench which decided the later case, purported to explain that that earlier decision was erroneous in so far as it decided that the piece-goods business carried on by A.L.A.R Firm in that case was not a separate business. We do not how ever think that the ultimate decision in M/S. L.R Brothers…Applicant; v. The Commr. Of Income Tax…Opposite Party. was in any way affected in so far as the principle that was laid down in that decision is concerned, viz., that the test to apply must relate to the time when the capital was borrowed and not to the use of that capital during the particular account year in question. As we have pointed out, even giving full weight to that decision, it has yet to be established that the money was in fact borrowed for the purposes of the business, and that could be shown only by the use of the money, whether in the particular account year or during an earlier period. For instance, it may so happen that money borrowed has been utilised for the purpose of the business to the fullest extent in some years and if it is money-lending business, such lendings might have been realised so that in a subsequent year only a small part of the money borrowed might have been lent out. That would not affect the right of the assessee to the allowance of the interest paid on borrowed capital. The position would be signally different if the money borrowed never appeared to have been utilised at all for the purposes of the business, but, on the other hand, had been utilised for a totally different purpose.

9. We are of the view that though the test should relate to the position as at the time of the borrowing, if it is not shown that the money had been utilised for some time, at least some point of time, for the purpose of the business, the interest paid on that portion of the sum borrowed, which was never utilised, cannot possibly be allowed. It is precisely upon this point that the case of the assessee-firm breaks down. Nothing has been stated before us to support the view that from the time when the money was borrowed, except for advances to the Sangli firm, there was any case of any money-lending, that is to say, that the sum borrowed was utilised for the purpose of the business. A major part of the amount was advanced to the partners of the firm alone. We shall now have to consider whether such advances to the partners, when no interest was charged upon such advances, can properly be described as in the course of the business activities of the firm.

10. Mr. Balasubrahmanyan points out that section 10(1) of the Act starts by referring to the profits or gains of any business, profession or vocation carried on by an assessee. He emphasises the expression “business carried on”. Again, in sub-section (2), which deals with the method of computation and allowances to be made, the expression “such profits or gains” is used. It is accordingly the contention of the learned counsel that unless the business is carried on, no question of grant of any allowances under subsection (2) can at all arise. In the instant case, learned counsel for the department urges that the money-lending business was not carried on at all and, therefore, no question of allowance of interest paid on borrowed capital can arise. This line of argument does no doubt pose some difficulty, but we are not able to agree that solely for the reason that the business had to be stopped, the interest on capital which had been borrowed and which is outstanding is not at all allowable. This aspect of the matter we have dealt with sufficiently in the earlier part of this judgment. The further question that we have indicated is whether the advances made to the partners can be said to be in the course of the business activities of the firm, There is nothing in law which prevents a firm from lending out moneys to its own partners and the partner figuring as a debtor to the firm. But where the partner utilises the funds of the firm for his own individual purpose, could it be said that the money so taken by the partner represented a money-lending transaction which would be in the course of the business of the firm? It has to be noted that though several lakhs of rupees had been advanced to the partners in this manner, there was no question of charging any interest on those advances. We find it impossible to believe that if the stated business of the firm was one of money-lending, it could possibly have made advances of this description without charging any interest and still claim that the advances were made in the course of the business of the firm. We are accordingly of the view that these advances were not made in the course of the business of the firm, and since the disallowance of interest paid on borrowed capital was limited only to such advances which were not in the course of the business, the conclusion reached by the departmental authorities and the Tribunal seems to us to be substantially correct. Question No. 1 is thus answered against the assessee.

11. On the other question, there seems to be very little to be said in favour of the claim. The partners in their individual capacity purport to say that if the interest payment is disallowed in the assessment of the firm, then that very same interest payment ought to be allowed in their individual assessments. We can find no principle or authority which can possibly support this contention. The allowance under section 10(2)(iii) relates to the interest paid by the assessee on capital borrowed for the purpose of his business. That the partners made use of the moneys of the firm for their individual purposes and purchased properties or made investment of those moneys is not sufficient to bring the transaction within the scope of the expression “capital borrowed for the purpose of the business”. It was never the contention, as far as we can see, that the partners in their individual capacity were in fact carrying on a business of the nature of investments or purchase of properties. Nor can it be said that it was at all a borrowing. In addition, we have pointed out that the partners utilised the moneys of the firm for the discharge of their own income-tax liabilities. We are unable to see by what process of interpretation the drawal of such amounts from the partners' drawing accounts can be regarded as capital borrowed for the purpose of the business. Neither in fact nor in law can the claim in this regard be at all justified. This question is also answered in favour of the department. The department will be entitled to its costs. Counsel's fee Rs. 250 (one set).