S.S. Sharma, J.
1. This is a reference under Section 256(1) of the I.T. Act, 1961 (hereinafter referred to as 'the Act'), referring the following question of law :
' Whether, on the particular facts and in the circumstances of the case, the Tribunal was right in law in holding that the amount of Rs. 13,020 was not disallowable from and out of the assessee's claim for interest payment in respect of its borrowings '
2. The assessment year in question is 1976-77. The assessee-firm has been carrying on the business of manufacture and sale of paper. It had been maintaining accounts under the mercantile system of accounting and the accounts are closed on 31st December, every year. The assessee-firm had credited interest on the credit balance of all the partners excepting for Shri Chandmal Agarwal who had a debit balance in his capital account. No interest had been charged on the said debit balance by the assessee. The assessee had paid interest on borrowings to outsiders. The ITO, therefore, inferred that borrowings to the extent of the debit balance in the partner's account had not been utilised for business purposes and thus disallowed the proportionate interest. The assessee had claimed deduction on account of interest to the extent of Rs. 13,020, which was disallowed on the aforesaid reasoning of the ITO. The AAC upheld this finding of the ITO and, according to him, there was no explanation for not charging interest on the debit balance of the partners. The Tribunal, however, allowed the assessee's appeal and the disallowance was deleted.
3. The mere fact that there was no plausible explanation for not charging the interest on the debit balance, when interest had been paid by the assessee on the borrowings by itself would not be enough to infer that the borrowings to the extent of the debit balance in the partner's account had not been utilised for business purposes. In the instant case, the interest that had been paid to the partners had already been added back in the total income. In CIT v. Gopikrishna Muralidhar : 47ITR469(AP) , loans had been taken for carrying on the business but the family used to withdraw some amount from the business whenever the occasion arose. The Department's submission is that that part of the amount borrowed having been later used for personal expenses would deprive the assessee of the benefit of Clause (iii) of Sub-section (2) of Section 10 of the Indian I.T. Act, 1922, was rejected. The decision of the Bombay High Court in Bai Bhuriben Lallubhai v. CIT : 29ITR543(Bom) , was rightly distinguished. The reasoning given even in Gopikrishna Muralidhar's case : 47ITR469(AP) , with which we agree, equally applies to the instant case. In our opinion, therefore, no exception could be taken to the view taken by the Tribunal.
4. That being so, we would answer the question as follows :
5. On the particular facts and in the circumstances of the case, the Tribunal was right in law in holding that the amount of Rs. 13,020 was not disallowable from and out of the assessee' claim for interest payment in respect of its borrowals.
6. There shall be no order as to the costs.