JAGANNATHA SHETTY, J. ( 1 ) THIS is a reference under Section 256 (2) of the I. T. Act, 1961. The following question has been referred by the tribunal :"whether, on the facts and in the circumstances of the case, the tribunal was right in disallowing the interest paid to partners, while computing the capital gains?" ( 2 ) THE assessment year is 1971-72. The assessee which is an unregistered firm had purchased a piece of land on september 2, 1964 with an intention to construct a theatre thereon. But that proposal was given up, as there was no hope of getting a licence. But the levelling work was carried out for improving the property although no construction took place. After lapse of nearly six years, the land was sold to m/s. East West Hotels Ltd. , Under a registered sale deed dated June 30, 1970 for Rs. 7,74,250/ -. The assesses offered for assessment as capital gains a sum of Rs. 2,03,910/- by deductiory from the sale price, the original cost of the land which was Rs. 2,00,000/-, cost of stamp paper and other charges of Rs. 14,361/ -. The assesses also deducted interest amount of Rs. 56,362/- paid to partners from the date of purchase to the date of sale on capital. The Income-tax Officer held that in computing the capital gains only the cost of acquisition of the asset and cost of improvement of the asset end expenditure incurred wholly and exclusively in connection with the transfer of the asset can be deducted. He, therefore, did not permit the deduction of the interest paid to partners on capital. He accordingly refused to deduct the sum of Rs. 56,362/- in computing the capital gains. This view of the I. T. O. has been shared by the Appellate Assistant Commissioner and the Appellate Tribunal by dismissing the appeal preferred by the assessee. ( 3 ) BEFORE us, Mr. Sarangan, learned counsel for the assessee, urged that although the payment made to the partners described as interest on capital, but in substance it went to the cost of acquisition of the capital asset and, therefore, it is liable to be deducted while computing capital gains under section 48 (ii ). The learned counsel in support of his contention wanted to draw an analogy between the capital nvested and the amount advanced by partners. The learned counsel in support of his contention wanted to draw an analogy between the capital nvested and the amount advanced by partners. According to the learned counsel, an interest paid on borrowed capital for the purpose of acquiring the asset would go to increase the cost of acquisition and, therefore, it should be deducted. The example given by the learned counsel may be correct, but that principle cannot be extended to the interest paid on capital. May be the capital contributed by partners was utilised for purchasing the asset of the partnership firm, but it is not the same thing to state that the interest paid on such capital out of the profits would go to the cost of acquisition of the capital asset. The learned counsel then referred to us the provisions of Section 13 (c) of the Indian Partnership Act which authorises, subject to the contract between the partners, payment of interest on the capital subscribed by partners and such interest shall be payable only out of the profits. It is true that the partners can receive interest on the capital subscribed by them subject to contract between them. But the right to receive interest under the terms of the partnership is one thing and the deduction of such interest for computing capital gains is another thing. One has no relevancy with the other. We, therefore, answer the question in the affirmative and against the assessee. --- *** --- .