1988 (11) TMI 153 - AT - Income Tax

Summary

Issues:
Claim for deducting interest paid by the assessee in computing share of income from the firm assessable in his hands.

Analysis:
The appeal revolved around the deduction of interest of Rs. 25,047 paid by the assessee to the firm in calculating the share of income from the firm assessable in his hands. The partnership deed specified that partners may contribute additional amounts carrying interest for the partnership business. The assessee's current account showed interest debited as part of losses incurred in previous years. The Income Tax Officer (ITO) disallowed the deduction under section 36(1)(iii) of the Income-tax Act, 1961, as the assessee had not borrowed capital for investment in the firm. The Commissioner (Appeals) upheld this decision.

In the further appeal, the assessee argued that the interest paid should be allowed as a deduction as it was an expenditure laid out for the business under the partnership deed. The Revenue contended that since the assessee had not withdrawn any amount, no interest should be debited, and the capital was not borrowed for investment. The Tribunal analyzed the partnership deed, the nature of the interest debited, and the business relationship between the partners.

The Tribunal held that the interest debited to the assessee was a reimbursement for capital borrowed by the firm for business purposes. It was considered an expenditure laid out for the business under section 37 of the Act. The interest was deemed to be the cost of capital indirectly borrowed for making up losses, thereby affecting the real income of the assessee from the firm. The Tribunal emphasized the business aspect of the transaction and the partnership agreement in allowing the deduction.

The Tribunal concluded that the interest paid by the assessee was a legitimate deduction in computing the share of profits from the firm. It was held that the interest was related to capital losses incurred in previous years and was essential for ascertaining the true income of the assessee from the partnership business. The orders of the lower authorities were reversed, and the ITO was directed to recompute the total income after allowing the deduction of Rs. 25,047. Consequently, the appeal was allowed.