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Section 36(1)(iii) of the income-tax act, 1961-Interest on capital borrowed-Assessee-firm did not charge any interest on debit balance of its partner but paid interest on its borrowings to outsiders - Whether proportionate amount of interest paid not deductible on the ground that corresponding amount borrowed not utilised for business purposes - Held, on facts, no Facts The assessee-firm was maintaining mercantile system of accounting. During the assessment year 1976-77 it had credited interest on the credit balance of all its partners except for one, C, who had a debit balance in his capital account. The assessee did not charge any interest on the said debit balance. It, however, paid interest on its borrowings to outsiders. The ITO observed that the borrowing to the extent of debit balance in the partner's account had not been utilised for business purposes. He accordingly, disallowed the proportionate interest. The AAC sustained the ITO's order, holding that there was no explanation for not charging interest on the said debit balance. However, on second appeal, the Tribunal deleted the impugned disallowance. On reference: Held The mere fact that there was no plausible explanation for not charging 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 debit balance in the partners' 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. Accordingly, the impugned amount was deductible. Case Review CIT v. Gopikrishana Muralidhar [1963] 47 ITR 469 (AP) applied. Bal Bhuriben Lallubhai v. CIT [1956] 29 ITR 543(Bom.) distinguished. Cases referred to CIT v. Gopikrishna Muralidhar [1963] 47 ITR 469 (AP) and Bai Bhusiben Lallubhai v. CIT [1956] 29 ITR 543 (Bom.). Judgment S.S. Sharma, J.-This is a reference under section 256(1) of the Income-tax 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…

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