Assessee-firm had borrowed loan from bank and raised fresh capital from incoming partner to settle debt/capital account of retiring/outgoing partners.  Assessing Officer characterized settlement as a family arrangement and disallowed interest paid by assessee-firm to capital account of partners and loan borrowed from Punjab National Bank under section 36(1)(iii). CIT(A) affirmed the disallowance. On appeal the Tribunal held that  when asset was owned by partnership firm, any settlement out of assets belonging to firm to outgoing partners, could not be considered as settlement of family property and just because, partners were family members and merely because assets were revalued before reconstitution of partnership firm, could not be a reason for Assessing Officer to treat settlement of firm properties among partners as settlement of family property. Settlement of capital account of outgoing partners became debt of partnership firm and discharge of said debt out of borrowed funds assumed character of loans/funds borrowed for purpose of business of assessee.  Since, loan borrowed from bank and capital raised from incoming partner was for purpose of business of assessee, any interest paid on said loan and capital account was nothing but interest paid on loan borrowed for purpose of business of assessee and allowable under section 36(1)(iii). (AY. 2007-08)