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Issues:
1. Deductibility of interest under section 37 of the Income-tax Act. 2. Whether partnership capital allotted to the divided son constitutes borrowal under section 67(3). 3. Deductibility of interest under section 37 if the answer to the second issue is negative. Detailed Analysis: 1. The judgment pertains to the assessment year 1977-78 involving an assessee who was the karta of a Hindu undivided family with interests in two partnership firms. Following a partition, the capital in the firms was divided between the father and the minor son. The dispute arose regarding the deduction of interest paid by the assessee to his son and interest received from the firms. The Income-tax Officer disallowed the interest deduction for the assessment year 1977-78. The Appellate Assistant Commissioner upheld the disallowance, stating that section 67(3) does not permit the deduction as no borrowing towards capital was made. On further appeal to the Tribunal, the assessee contended that as per the partition arrangement, he was to pay interest on the share capital invested in the firms. The Tribunal held that the interest received by the assessee belonged to his son as per the partition deed and allowed the deduction under section 37, relying on a previous court decision. 2. The Tribunal found that the assessee had an obligation to part with half of the interest received from the partnership firms for the benefit of his son, as per the partition arrangement. The Tribunal also held that there was an overriding title in respect of the interest received by the father, requiring him to share it with his son. Additionally, the Tribunal rejected the claim for interest at 12% on the amount standing to the credit of the son in the books of the assessee, as it was not established that the father was obliged to retain that money in the firms. However, the Tribunal allowed the claim that the son was entitled to receive half of the interest on the entire share capital held by the father in the firms. 3. The judgment resolved the three referred questions, with the court finding it unnecessary to answer the first question regarding the deductibility of interest under section 37. This decision was based on the Tribunal's finding that the interest of the assessee's minor son could not be treated as the income of the assessee due to an overriding title. As a result, the court held that the assessee was entitled to a deduction of half of the interest received, which belonged to the son. The court did not address the second and third questions raised by the assessee's counsel, as they were not pressed. Ultimately, the court answered the first question in favor of the assessee, allowing the deduction of the interest belonging to the son.
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