9911796707
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Issues Involved:
1. Disallowance of interest payment of Rs. 71,500 in the assessment of the firm. 2. Allowance of the sum of Rs. 71,500 paid by the firm towards interest as a deduction under section 10(2)(iii) in the assessment of the individual partners. Issue 1: Disallowance of Interest Payment in the Assessment of the Firm The firm, Roopchand Chabildass and Sons, had borrowed substantial amounts and paid interest on these borrowings. However, it did not charge interest on advances made to its partners and another firm, Sangli firm. The Income-tax Officer (ITO) disallowed a portion of the interest payment claimed by the firm, reasoning that the advances to the partners and the Sangli firm were not for business purposes. The ITO allowed only a proportionate interest deduction, disallowing Rs. 71,500 out of Rs. 95,300 claimed. The firm argued that the advances to the Sangli firm were in the course of business and that the partners' advances were used for investments subjected to tax. The Appellate Assistant Commissioner and the Income-tax Appellate Tribunal upheld the ITO's view, emphasizing that the bulk of the borrowings was not utilized for business purposes. The court examined whether the advances represented money-lending transactions within the business scope of the firm. It was found that the Sangli firm, though legally distinct, was practically an alter ego of the assessee-firm, and the advances to it could be considered a business transaction. However, the advances to the partners were not for business purposes as no interest was charged, and the funds were used for personal investments. The court concluded that the disallowance of interest payment was justified as the borrowings were not utilized for business purposes. The test for allowance under section 10(2)(iii) relates to whether the borrowed capital was used for business purposes, which was not the case here. Thus, the disallowance of Rs. 71,500 was upheld. Issue 2: Allowance of Interest Payment as Deduction in the Assessment of Individual Partners The partners contended that if the firm's interest payment was disallowed, it should be allowed in their individual assessments since the borrowed funds were used for investments generating taxable income. The ITO rejected this, stating that the partners would be entitled to such allowance only if they had paid interest on the borrowed capital, which they had not. The court found no basis for allowing the interest payment in the individual assessments. The allowance under section 10(2)(iii) pertains to interest paid on capital borrowed for business purposes. The partners' use of firm funds for personal investments and income-tax liabilities did not qualify as business borrowings. Therefore, the claim for deduction in individual assessments was unjustified. Conclusion: The court answered both questions against the assessee. The disallowance of Rs. 71,500 in the firm's assessment was upheld, and the claim for deduction in the individual partners' assessments was rejected. The department was entitled to costs of Rs. 250.
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