HON’BLE SUPREME COURT · SOURCE-REVIEWED NOTE
Badal Ram Laxmi Narain v. Commissioner of Income-tax, Lucknow
Civil Appeal Nos. 657 of 1979 and 2117–2121 of 1977
[1991] 2 SCR 920 ·
Section 36(1)(iii), as expressly discussed in the judgment; printed Act-year discrepancy disclosed
Sources & disclosures includedDownload original judgment / order
K. Jagannatha Shetty and Yogeshwar Dayal JJ. · K. Jagannatha Shetty J. · Yogeshwar Dayal J.
Assessment years: Not stated in the report
01 · Facts of the case
A Hindu undivided family carried on a longstanding business at Varanasi entirely with borrowed capital. Following a partial partition on 20 October 1951, its members formed a partnership and continued the business. A debit balance of Rs. 1,75,310 was transferred equally to the three partners' personal accounts, and the firm assumed the business assets and liabilities. It claimed deduction of the interest on that balance, contending that the liability had been assumed for the business goodwill. The Appellate Assistant Commissioner rejected the goodwill claim. The Tribunal inferred from the longstanding, flourishing business that assumption of the liability represented consideration for goodwill. On reference, the Hon'ble High Court rejected that inference, relying on the absence of corresponding accounting entries and the partners' personal responsibility for family debt.
02 · Discussion by the Hon’ble Court
The Hon'ble Supreme Court expressly discussed section 36(1)(iii), explaining that the borrowing must be for business or professional purposes and that interest on capital borrowed to acquire goodwill is deductible in that setting. The Tribunal had linked the assumed debit balance to goodwill of the running business. The Hon'ble High Court's contrary conclusion was itself an inference from the same material. Because this was only a partial partition and the family retained other property, the firm was not obliged to assume the balance merely because its partners were family members. The Tribunal's inference was reasonable and warranted; the existence of another possible inference did not justify interference on reference. Personal liability of individual family members did not defeat the firm's own deduction claim.
03 · Judicial decision
The Hon'ble Supreme Court allowed the appeals and set aside the Hon'ble High Court's decision. It answered the referred question in each case in favour of the assessee and against the Revenue. The assessee was entitled to one set of costs in the Hon'ble Supreme Court. The decision sustained the Tribunal's fact-based conclusion that assumption of the debit balance represented consideration for goodwill and that the interest was deductible.
04 · Outcome / in whose favour
The assessee succeeded on the referred interest-deduction question. The result rests on the reasonable inference drawn from this running business and its partial-partition facts. It does not establish that every family liability taken over by a partnership becomes a business borrowing, or that an accounting entry alone proves a goodwill acquisition.
Source: Scope of the assessee's success
05 · AKHB REVIEW POINT
AKHB analysis: Establish the business purpose of the assumed liability with evidence of the transferred business, its goodwill and the consideration arrangement. Distinguish the firm's claim from the personal obligations of the former family members. When relying on the Tribunal's findings, identify the supporting material and whether its inference is unreasonable or unwarranted; a merely competing inference is insufficient in the reference setting considered here. Preserve the report's printed Act-year discrepancy in citations and separately verify the applicable enactment, assessment year, later treatment and present statutory requirements before using the case in a live matter.
Source & verification
Download original judgment / order · Open cited source rendition
Complete four-page report, SCR 920–923, read, including headnote, facts, reasoning and final order. The printed Act-year discrepancy is expressly retained; no assessment year is supplied by inference.
- The Orissa and Allahabad High Court-hosted copies repeat the printed Act-year label. Neither is treated as a corrigendum.
- The 1951 partial partition is a factual event, not a finding of the assessment years before the Hon'ble Court.
- The final order awards one set of costs and allows the appeals; it is not a remand.
Statutory scope
SCR 920–921 pairs section 36(1)(iii) with the printed year 1922. The operative reasoning at SCR 923 expressly discusses section 36(1)(iii). This note reports that reasoning without silently replacing the printed year or representing that an authoritative correction has been obtained. The report does not state the assessment years.
Later treatment
Source checked 2026-10-18. Historical judgment as delivered on 12 July 1991. Subsequent precedent treatment and present statutory application have not been cleared.
Page references identify the supplied PDF; paragraph references identify the judgment unless stated otherwise.
Identified source links
- reported judgment — PDF 4 pages
SHA-256: aaaa5353ea514e449d43864360ea95ebde830bf6f764a80dbccd5630241383f3
AI disclosure & professional disclaimer
This AKHB research note was prepared with AI assistance from an identified primary report. Independent human review is not represented.
General legal and tax research only; not legal or tax advice. Verify the complete judgment, applicable statutory version and subsequent treatment before reliance. The AKHB REVIEW POINT is editorial analysis, not the Court's holding. No current-law clearance is claimed.