Isaac, J.:— These two references have been made by the Madras Bench of the Income-Tax Appellate Tribunal under section 66(2) of the Indian Income-Tax Act, 1922, as directed by this court on the applications made by the assessee. These cases relate to the assessment years 1960–61 and 1961-62. The questions referred in the first case are:

“1. Whether, on the facts and in the circumstances of the case, the inferences of the Tribunal that Vijayamohan Metal Printers owned by the assessee, his wife and minor children has nothing to do with the business of the assessee and that the interest incurred by the assessee for raising loan for the purpose of the said business is not an allowable item of expenditure in computing the income of the assessee were justified?

2. Whether, on the facts and in the circumstances of the case, the Tribunal was justified in inferring that out of the total loan raised during the accounting year, the sum of Rs. 1,32,081 could not be considered as for the purpose of his business, that it could only be in respect of the debit balance in the profit and loss account and that the assessee is not entitled to claim as a business expenditure the interest due on the said amount?”

2. There is only one question in the second case; and it is the same as question No. 1 in the first case. During the year ended December 31, 1959, the assessee was conducting a tin factory for manufacture of tin containers; and he was also exporting cashew kernels and conducting a saw mill. Formerly, he was running a stage carriage business under the style of Vijayalakshmi Motors. This business was sold away in 1956 with all the vehicles. Some years ago he worked a forest coupe at Nagercoil. He had another saw mill under the name Asramam Saw Mills, which he leased out in 1953. But he resumed this business in October, 1956. He also owned a cashew factory in the name of Eastern Exporting Corporation which he leased out in 1954. But he resumed this business in 1959. Advances made by the assessee for the aforesaid four businesses were shown in the accounts of the tin factory. The total balances as on December 31, 1957, were the following:

Rs. Vijayalakshmi Motors 93,890.64 Nagercoil coupe 42,742.35 Eastern Exporting Corporation 1,14,828.17 Asramam Saw Mills 33,298.48

3. All the above four amounts, which would make a total of Rs. 2,84,759.64, were debited in the profit and loss account of the assessee on 1st January, 1958, along with two other items amounting to Rs. 4,87,527.48. The total of these debits came to Rs. 7,72,287.12. The total credits in the above account on the above date was Rs. 4,08,481.73; and this represented the net profit from 1946 to 1957. Income during the year 1958 came to Rs. 83,292.37. The net position in the assessee's profit and loss account as on December 31, 1958, was a debit of Rs. 2,80,513.02. This was brought forward to the year 1959; and the balance-sheet for the assessee's tin factory for the year ended December 31, 1959, showed the above amount as a debit balance.

4. The assessee has formed a partnership along with his wife and minor children under the style of Vijayamohan Metal Printers with the object of setting up a tin printing factory. This business has not commenced production. Certain amounts were advanced to the above firm from the assessee's tin factory business; and their total as on December 31, 1959, came to Rs. 1,68,334.

5. The assessee's income from the tin factory for the year 1959 as per his books of account was Rs. 82,629. His total borrowings during this year as per the said books came to Rs. 9,70,357. In arriving at the above income, the assessee claimed a deduction of Rs. 72,941 as interest on loans. The Income-Tax Officer found that, out of the above borrowings, Rs. 5,65,498 had been diverted for non-business purposes; and he, accordingly, disallowed a proportionate part of the interest, which the assessee claimed to deduct. The aforesaid sum of Rs. 5,65,498 included Rs. 1,68,334 advanced to the assessee's firm, and Rs. 2,80,513.02 debited in the profit and loss account of the assessee, as already stated. Regarding the advance to the firm, the assessee contended that the partnership business was an extension of his own business; that, as the income of the firm would be deemed as his income under section 16(3) of the Act, the advance made to the firm was an amount spent for his own business, and hence the interest incurred by the assessee for raising loan for the business of the firm was an allowable expenditure. This contention was repelled by the Appellate Tribunal as well as the subordinate authorities. Question No. 1 in the first reference case relates to this matter.

6. Regarding the debit of Rs. 2,80,513.02 in the profit and loss account, the assessee raised two contentions before the Appellate Tribunal. First, the debits of the four amounts (mentioned in paragraph 2 above), making a total of Rs. 2,84,759.64 on 1st January, 1958, in the profit and loss account of the assessee did not mean any actual drawings by the assessee from the business; they were only account adjustments; the notional depreciation written off during the prior years would cover more than the debit of Rs. 2,80,513.02 found in the profit and loss account of the assessee; and the said amount should not, therefore, be treated as a diversion of amounts for non-business purpose. Secondly, the aforesaid four debits related to existing business of the assessee; and, even if they were considered as actual drawings from the tin factory business, they were for the purposes of the said four businesses, and hence these amounts cannot be treated as diversions for non-business purpose. The Appellate Tribunal did not consider the first contention, though it has been referred to in paragraph 27 of its order.

7. Regarding the second contention, the Appellate Tribunal found that the Eastern Exporting Corporation and the Asramam Saw Mills were existing business concerns of the assessee, and that the two sums debited to the profit and loss account of the assessee, total of which came to Rs. 1,48,126.65 cannot be treated as diversion for non-business purpose. Deducting this amount from the sum of Rs. 2,80,207.02, there is a balance of Rs. 1,32,080.37, in respect of which the claim for allowance of interest stands finally rejected. Question No. 2 in the first reference relates to this matter.

8. For the assessment year 1961–62, the assessee claimed a deduction of Rs. 78,100 by way of interest paid on his total borrowings. His accounts showed an investment of Rs. 4,05,298 in the firm, Vijayamohan Metal Printers. The Income-Tax Officer disallowed the interest in respect of the said amount on the ground that the borrowings were not for the purpose of the assessee's business to that extent. His contention that the firm's business should be treated as his own business was rejected by the Appellate Tribunal as well as by the subordinate authorities on the same ground as for the year 1960-61. The question referred in the second reference relates to this matter.

9. We shall first consider question No. 1 in the first reference; and that is also the same question in the second reference. The Appellate Tribunal disallowed the interest claimed by the assessee in respect of the advances made by him to the firm out of his total borrowings during the accounting years ended 31st December, 1959 and 1960, on the ground that the firm was under the Act a separate entity altogether, that the borrowings made by the assessee to the extent of the amounts advanced to the firm were not for the purpose of his business, but they were for the purpose of the firm's business. The assessee's learned counsel contended that the firm's business was also the assessee's business, particularly in view of the fact that the firm's income would be deemed as the assessee's income by virtue of section 16(3) of the Act. We do not think that this contention is tenable. A firm, whether registered under the Act or not, is, for the purpose of the Income-Tax law, an entity distinct from its partners. The fact that one of the partners is the husband or wife, as the case may be, of the other partner, or that minor children have been admitted to the benefits of a partnership, of which the parents alone are the partners does not make any difference on the above legal position. But the obvious question that arises for consideration is whether, in computing profits and gains from the business of a person, he is entitled to claim deduction of interest paid on borrowed investment in a firm, of which he is a partner.

10. It is now well settled by the decisions of the Supreme Court in Anglo-French Textile Co. Ltd. v. Commissioner of Income-Tax [1953] 23 I.T.R 82, [1953] S.C.R 448. and Commissioner of Income-Tax v. Muthuraman Chettiar, that all the businesses of an assessee constitute one head under section 10 of the Act; and that, in order to determine the profits and gains from business under section 10, an assessee is entitled to adjust against his profits from one business the losses incurred by him in another business. In other words, while profits or losses of each distinct business may be computed separately, the tax is payable under section 10, not on the separate income of every distinct business, but on the aggregate of the profits of all the businesses carried on by the assessee, after adjusting the profits of one or more businesses against the losses, if any, in other businesses. In Shantikumar Narottam Morarji v. Commissioner of Income-Tax [1955] 27 I.T.R 69, 76., the Bombay High Court held that a partner of a registered firm, when computing the profits and gains from business, is entitled to claim deduction of interest paid by him on borrowed investments in his firm. Dealing with this question, Chagla C.J said:

“…the first question that we have to consider is whether section 10 has any application to the case of an assessee who is a partner of a registered firm. Mr. Joshi's contention is that section 10 has no application at all because section 10 deals with the profits of a business carried on by the assessee and according to Mr. Joshi the business in this case is not carried on by the assessee but is carried on by the assessee along with a partner or partners. Mr. Joshi says that a firm under the Indian Income-Tax Act is an assessable entity and therefore a distinction must be made between a business carried on by a firm and a business carried on by an individual. Although a firm is an assessable entity under the Indian Income-Tax Act, a firm is not a legal entity. In the eye of the law a firm is a compendious expression used to indicate that several persons constituting that firm are carrying on a business. But that compendious expression cannot give to the firm a legal entity or a legal existence. In law it is only the partners who exist and who carry on the business. It is equally true that looking to the definition of ‘partnership’ in section 4 of the Partnership Act, when you have a partnership business, the business is carried on by each of the partners, and the definition of a partnership in the Partnership Act has been incorporated in the Indian Income-Tax Act in section 2(6B). Therefore the contention that section 10(1) cannot apply to a partner in a registered firm is untenable because he does carry on the business although that business happens to be a partnership business, and therefore if any profits and gains are derived by the assessee from the business carried on by him, those profits and gains must be brought to tax only under the head, viz., the head falling under section 10(1), which is the head of business.”

11. The above passage was quoted with approval by the Madras High Court in Muthuraman Chettiar v. Commissioner of Income-Tax. This decision was affirmed by the Supreme Court in Commissioner of Income-Tax v. Muthuraman Chettiar. It was held in this case that an individual, who was ordinarily resident in India and carrying on business in India, was entitled to set off the loss incurred by him as partner of a non-resident firm carrying on business outside India, against his profits and gains from business carried on in India.

12. The Madhya Pradesh High Court held in Seth Sorabji Framji Kerawala v. Commissioner of Income-Tax [1962] 45 I.T.R 454. that, in computing the individual income of a partner of an unregistered firm, interest paid by him to outsiders on moneys borrowed and advanced by him to the firm for the purposes of the business of the firm is allowable, as a deduction, if the firm itself was not assessed as a unit. It also held that the position would be different if the unregistered firm is assessed as a separate unit. We are not sure whether this would make any difference in the light of the decision of the Supreme Court in Muthuraman Chettiar's case. In Arunachalam Chettiar v. Commissioner of Income-Tax [1936] 4 I.T.R 173, 179 P.C. the Privy Council said:

“… whether a firm is registered or unregistered, partnership does not obstruct or defeat the right of a partner to an adjustment on account of his share of loss in the firm, whether the set-off be against other profits under the same head of income within the meaning of section 6 of the Act or under a different head (in which case only need recourse be had to section. 24(1)).”

13. Reference may also be made to the decision of the Gujarat High Court in Commissioner of Income-Tax v. Fethalal Zaverchand Patalia [1966] 61 I.T.R 357, 360.. In that case, an assessee, who was an individual and carrying on his own individual business, was a partner in two firms at the material time. One of these firms made a return showing a loss; but as the return was filed long after the expiration of the prescribed period, the Income-Tax Officer ignored the return, and did not proceed to assess the firm. The result was that the firm remained unregistered and unassessed during the relevant assessment year. The assessee claimed to adjust his share of the loss in this firm against his profits from other businesses in computing his business income under section 10 of the Act. In upholding the claim Shelat C.J said:

“The business carried on by the firm in which the assessee is a partner would, therefore, be business carried on by the assessee and the assessee's share in the profit or loss of the firm would represent his profits or gains of business carried on by him and would be liable to be taken into account in the computation of his income under section 10. This reasoning would apply equally whether the firm be registered or unregistered and it must, therefore, follow that, even where the firm is unregistered, the assessee's share in the profit or loss of the firm is liable to be taken into account in computing his income under section 10 and if such share is a loss, it must be adjusted against his profits from other businesses.”

14. Applying the propositions of law well established by the decisions referred to above, there can be no doubt that the assessee in the present case is entitled to deduct the interest paid by him on moneys borrowed and advanced by him for the purpose of the business of the firm, “Vijayamohan Metal Printers”. The firm, as already stated, consists of only the assessee, his wife and minor children. The firm has not commenced production; and it was neither assessed nor registered under the Act for the relevant assessment years. If the firm made any profits, the same would have been deemed as part of the income of the assessee by virtue of section 16(3) of the Act. The fact that the firm is not registered or that it did not make any profit is no reason for not allowing interest paid by the assessee on the borrowed investments in the firm, which admittedly were for the purpose of the business of the firm. We shall now proceed to consider the second question in I.T.R Case No. 39 of 1967. When the sum of Rs. 7,72,287.12 consisting of the items mentioned in paragraph 2 above was debited in the profit and loss account of the assessee as on 1st January, 1958, the amount available to the credit of the above account was only Rs. 4,08,481.73, which represented the balance of the undrawn profits from 1946 to 1957. The sum of Rs. 2,80,513.02 shown as debit balance in the assessee's profit and loss account as on December 31, 1959, was arrived at, after taking into account the aforesaid sum of Rs. 4,08,481.73 and the profit of Rs. 83,292.37 earned during the above year. Admittedly, the depreciation charged in the accounts up to December 31, 1957, amounted to Rs. 3,06,695; and if this amount is also taken into account, it would cover the debit balance of Rs. 2,80,513.02. The assessee's contention that the debits of the four amounts totalling to Rs. 2,84,759.64 in respect of the four businesses of the assessee, namely, Vijayalakshmi Motors, Nagercoil Coupe, Eastern Exporting Corporation and Asramam Saw Mills, did not represent actual drawings of the assessee, but they were only account adjustments, and that the accumulated depreciation of his business up to December 31, 1957, would cover more than the net balance of Rs. 2,80,207 found in his profit and loss account, was not considered by the Appellate Tribunal, though it has been noticed in its order. As far as we could see, on the facts of this case, there are no materials to hold that the aforesaid sum of Rs. 2,80,207 or any part of it represented withdrawal of amounts by the assessee from the business.

15. In the result, we answer the questions referred to this court in the above cases in the negative and in favour of the assessee. The Commissioner of Income-Tax will pay the costs of the assessee. Counsel's fee is fixed at Rs. 250 for both cases together. A copy of this judgment will be forwarded to the Appellate Tribunal in each case, as required by section 66(5) of the Act.