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Issues Involved:
1. Whether a partner in a registered firm can claim any deduction against the amount of profit determined by the Income-tax authorities as the profits of the firm. 2. If permissible, whether the deductions claimed in this case are permissible deductions. Detailed Analysis: Issue 1: Whether a partner in a registered firm can claim any deduction against the amount of profit determined by the Income-tax authorities as the profits of the firm. The court examined the distinction between registered and unregistered firms under the Indian Income-tax Act. For unregistered firms, the firm itself is the assessee and liable to pay tax on its profits. However, for registered firms, the profits are divided among the partners, and each partner is assessed individually. The share of the profits must be included by the partner in his total income, and the assessment proceeds based on the partner's total income, which may include various sources such as property, dividends, and director's fees. The court discussed Section 23(5) of the Act, which states that in the case of a registered firm, the total income of each partner, including his share of the firm's income, shall be assessed, and the sum payable by him shall be determined. Mr. Joshi contended that a partner's only right is to pay tax on his share of the profits, and no other deductions are permissible. However, Mr. Palkhivala argued that certain exemptions under the Act are available to partners in registered firms, which are not available to partners in unregistered firms. The court noted that while exemptions are allowed after the income is ascertained, deductions must be made before the income is ascertained. Therefore, even if a partner in a registered firm is entitled to certain exemptions, it does not necessarily follow that he is also entitled to deductions under the Income-tax Act. The court concluded that it is not a general legal proposition that a partner in a registered firm is not entitled to claim any deduction against his share of the profits. It would be open to the assessee to claim a deduction if he satisfies the taxing authority that such deduction represents a necessary expenditure incurred to earn the profits subjected to tax. Issue 2: If permissible, whether the deductions claimed in this case are permissible deductions. The court examined whether the interest paid by the assessee on loans amounting to Rs. 1,54,097 and Rs. 1,88,381 was a permissible deduction. The assessee argued that the interest was paid to preserve and maintain an asset belonging to the business. However, the court held that it is impossible to contend that merely because the assessee pledges a capital asset of a business, the interest paid on those moneys would be a revenue expenditure deductible from the profits of the business. The assessee must establish that the moneys were borrowed for the purpose of the business or to enable the business to earn profits. The court found that the assessee failed to prove that the moneys were borrowed for any such purpose. The court also noted that the sum of Rs. 1,88,381 was borrowed to pay off some of the creditors of Narottam Morarji. The assessee contended that this was done to safeguard Narottam Morarji's share in the managing agency firm. However, the court pointed out that on the death of Narottam Morarji, the original partnership was dissolved, and Narottam Morarji's share no longer remained in the new partnership. There was no evidence to show that the new partnership could not have subsisted without the assets left by Narottam Morarji. The court concluded that there was no evidence to justify that the loans on which the interest was paid were borrowed to enable the assessee to earn the profits in the managing agency agreement. Conclusion: The court answered the first question in the affirmative to the extent indicated in the judgment, allowing the possibility of deductions if necessary to earn the profits. However, questions Nos. 2 and 3 were answered in the negative, as the assessee failed to prove that the interest paid on the loans was a permissible deduction. No order as to costs was made for this reference or the notice of motion. The reference was answered accordingly.
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