1. At the instance of the assessee, the following two questions are referred :
'1. Whether, on the facts and in the circumstances of the case, the claim of the assessee in respect of interest amounting to Rs. 7,517 is allowable under section 36(1)(iii) of the Income-tax Act, 1961 ?'
2. Whether, on the facts and in the circumstances of the case, the payment of Rs. 1,000 as municipal taxes is an allowable deduction for the assessment year 1962-63 ?'
2. The assessee is a registered partnership firm with three partners : Shri S. L. Rathi, Shri S. Y. Solao and M/s. Saroj Screens P. Ltd., Amravati. For the assessment year 1962-63 relevant to the accounting period ending on July 31, 1961, the assessee claimed allowance for interest amounting to Rs. 7,517 on borrowed capital under s. 36(1)(iii) of the I.T. Act. 1961. The ITO found that the debit balance of Shri Rathi amounted to Rs. 97,399. Since interest on this sum at 9 per cent. per annum exceeded the amount of interest for which deduction was claimed, it was disllowed. The assessee also claimed allowance for Rs. 1,200 paid by it as municipal taxes in respect of its branch, M/s. Rajkamal Talkies. The taxes paid were in respect of the year 1954-55 to 1958-59. Under the agreement, the assessee was liable to pay municipal taxes at the maximum rate of Rs. 200 per year, and the liability accrued every year. As the account books of the assessee were on mercantile basis and not on cash basis, the ITO allowed the claim of allowance to the tune of Rs. 200 only and disallowed the claim in respect of the earlier period. The AAC and the Tribunal upheld this order.
3. Shri Deo, the learned counsel appearing for the assessee, placing reliance on the statement, annex. A, filed for the first time before the Tribunal explaining the details of the manner in which the amount borrowed was actually spent, contended that the borrowed amounts were actually spent for the business as detailed in the said annex. A and, under the circumstances, the ratio laid down in the case of CIT v. Bombay Samachar P. Ltd. : 74ITR723(Bom) , applied to the present case. We find it difficult to accept this submission. The figures of borrowings specially by the partner, Shri Rathi, right from the year 1957-58 which have been quoted in extenso in the statement of the case as well as in the order of the Tribunal speak volumes. In the Bombay Samachar Ltd.'s case, the admitted position was that the capital borrowed by the assessee from outsiders was used by the assessee for the purposes of the business and that no part of the borrowed capital had been utilised for the purposes of advancing loans to any component of the company. Moreover, the statement, annex. A, was not filed before the ITO. It is not possible to ascertain the facts mentioned in annex. A in isolation without examining the other entries and, therefore, we find it difficult to base our judgment on the same. It is pertinent to notice that for the assessment year 1958-59 to 1960-61 the amount of interest paid to Shri Rathi was disallowed and the assessee accepted this disallowance without making any grievance. The Tribunal has also held this circumstance against the assessee, and in our judgment rightly. Under these circumstances, the view taken by the ITO, and ultimately confirmed by the Tribunal, is a possible view of the matter on evidence, and we find it difficult to find any legal flaw in the same. Consequently, question No. 1 is answered in the negative and in favour of the Revenue.
4. Admitted position is that the accounts of the assessee are on mercantile basis. The liability of taxes to the extent of Rs. 200 accrued every year. Under these circumstances, the fact of actual consolidated payment for five years in the relevant assessment year does not entitle the assessee to claim the entire deduction in one year. Consequently, question No. 2 is also answered in the negative and in favour of the Revenue. The assessee to bear the costs of this reference.