2000 (7) TMI 971 - AT - Income Tax

Summary

Issues involved: Whether the assessee is entitled to deduction of interest paid for capital investment in the firm against income received as remuneration.

Summary:
The appeals by the assessee pertain to the assessment years 1993-94 and 1994-95, focusing on the entitlement of the assessee to deduct interest paid for capital investment in the firm against income received as remuneration. A new taxation scheme introduced from the assessment year 1993-94 taxed firms at the maximum marginal rate and partners on their share income. Section 28(v) mandated that remuneration received by a partner from the firm is chargeable to income tax under the head 'profits & gains of business or profession'. The legal fiction created by the statute extends to the logical conclusion that interest paid by a partner for earning remuneration must be deducted. The objection raised by revenue authorities was countered by the fact that there cannot be a legal service contract between a firm and its partners, as the firm is not a legal entity. The Supreme Court precedent in CIT v. R.M. Chidambaram Pillai established that partner's salary is essentially a share of profits for their contribution to the partnership. This principle is recognized by the legislature through section 28(v), allowing deductions for interest paid on borrowed money for investment in the firm. Consequently, the assessee is entitled to deduct interest paid on capital investment in the firm against remuneration received and assessed under the head business.

Therefore, the Tribunal directed and allowed the appeals in favor of the assessee.