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Issues:
1. Deductibility of interest on liabilities against profits and gains of a business. Analysis: The case involved a Hindu undivided family engaged in a money-lending business and as partners in two other firms. Upon dissolution of the two firms, liabilities were distributed, including interest due on borrowed capital. The question was whether the interest amount could be deducted from the profits of the family's money-lending business. The Income Tax Commissioner and the petitioners admitted that the interest represented capital borrowed for the partnership businesses and was not paid from the family's businesses. The Commissioner disallowed the deduction, leading to the reference. The main argument revolved around whether interest paid on borrowed capital for one business could be set off against profits of another business under Section 10(2)(3) and Section 24 of the Income Tax Act. The Court agreed that if one business incurs a loss, it can be set off against profits of another business. The judgment discussed precedents and disagreed with a previous interpretation that limited set-off to losses within the same class of business. The Court emphasized that losses in one business could be set off against profits in other businesses. Further, the Court differentiated between trading losses and capital losses. The distribution of assets and liabilities upon dissolution was deemed a capital loss, not a trading loss. Citing relevant case law, the Court clarified that upon distribution, the assets became capital, not profits subject to income tax. Therefore, the interest amount claimed as a deduction due to the distribution loss was disallowed. The judgment concluded that no deduction could be claimed in such circumstances, and the answer to the reference question was in the negative. The Commissioner of Income Tax was awarded costs. In agreement with the lead judgment, the other judges concurred with the decision, solidifying the ruling's validity and consensus among the bench.
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