1968 (9) TMI 19 - HC - Income Tax

Interest incurred by assessee for raising loan for the business of firm - held that it is an allowale expenditure

Summary

Issues Involved:
1. Deductibility of interest on loans raised by the assessee for the business of Vijayamohan Metal Printers.
2. Determination of whether certain loans were for business purposes or non-business purposes.

Issue-wise Detailed Analysis:

1. Deductibility of Interest on Loans Raised for Vijayamohan Metal Printers:
The primary issue in both references was whether the interest incurred by the assessee on loans raised for the business of Vijayamohan Metal Printers, a partnership involving the assessee, his wife, and minor children, was an allowable expenditure. The Tribunal disallowed the interest claimed by the assessee, asserting that the firm was a separate entity under the Income-tax Act, and the borrowings were not for the purpose of the assessee's business but for the firm's business. The assessee contended that since the firm's income would be deemed his income under section 16(3) of the Act, the interest on loans for the firm's business should be deductible.

The court held that a firm, whether registered or not, is distinct from its partners for income-tax purposes. However, it is well established that all businesses of an assessee constitute one head under section 10 of the Act. Consequently, an assessee can adjust profits from one business against losses in another. The court referenced several judgments, including those from the Supreme Court and High Courts, affirming that a partner can claim deduction of interest paid on borrowed investments in a firm. Therefore, the court concluded that the assessee was entitled to deduct the interest paid on loans borrowed for the firm's business, as the firm consisted of the assessee, his wife, and minor children, and had not commenced production or been assessed or registered under the Act.

2. Determination of Loans for Business or Non-Business Purposes:
The second issue pertained to whether the sum of Rs. 1,32,081 out of the total loan raised during the accounting year was for the purpose of the assessee's business or non-business purposes. The Tribunal found that certain amounts, including Rs. 2,80,513.02 debited in the profit and loss account, were diversions for non-business purposes. The assessee argued that the debits were merely account adjustments and not actual drawings, and the accumulated depreciation would cover the debit balance.

The court noted that the Tribunal did not consider the assessee's first contention about the debits being account adjustments. The court emphasized that if the depreciation charged up to December 31, 1957, amounting to Rs. 3,06,695, was taken into account, it would cover the debit balance of Rs. 2,80,513.02. The court found no materials to support the view that the sum of Rs. 2,80,207 represented withdrawals by the assessee from the business. Consequently, the court concluded that the amounts in question did not represent diversions for non-business purposes.

Conclusion:
The court answered the questions referred to it in the negative and in favor of the assessee. The interest on loans raised for the business of Vijayamohan Metal Printers was deemed an allowable expenditure, and the amounts in question were not considered diversions for non-business purposes. The Commissioner of Income-tax was ordered to pay the costs of the assessee, with counsel's fee fixed at Rs. 250 for both cases.