1998 (2) TMI 155 - AT - Income Tax

Summary

Issues:
1. Claim for interest on a loan raised for investment in partnership firms.
2. Treatment of interest paid on a loan for investment in partnership firms.

Analysis:
The judgment pertains to an appeal by an assessee concerning the assessment year 1979-80, involving income derived from two partnership firms. The primary dispute revolves around the interest paid or payable on loans raised for investments in these firms.

The first contention raised in the appeal concerns a specific sum claimed to be due in relation to a loan raised for investment in one of the partnership firms. The assessee had not initially claimed this amount before the Income Tax Officer (ITO) due to the basis of interest calculation. However, the Appellate Tribunal allowed this claim, stating that the assessee had not been informed by the ITO about the intention to allow interest on an accrual basis. As the interest had accrued during the relevant year, the claim was deemed valid and allowed as a deduction.

The second contention involves a larger sum of interest claimed on a loan raised for investment in another partnership firm. The assessee had paid a significant amount as interest during the accounting year, but the ITO only allowed a portion of it as a deduction. The Appellate Tribunal upheld this decision, citing Section 67 of the Income-tax Act, which determines a partner's share of income from a firm. The Tribunal emphasized that the method of accounting followed by the firm is crucial in determining the partner's income. As the partnership firm maintained accounts on a mercantile basis, the interest paid on the loan for previous years was not allowable as a deduction for the current year.

In conclusion, the Appellate Tribunal partially allowed the appeal, granting the deduction for interest where it had accrued during the relevant year but denying the deduction for interest pertaining to earlier years based on the accounting method followed by the partnership firm. The judgment highlights the importance of adhering to the prescribed methods of accounting and statutory provisions in determining income and allowable deductions in partnership firm scenarios.