1968 (9) TMI 23 - HC - Income Tax

Interest on borrowed money - application of the borrowed money was not for the business at all - assessee is not entitled to a deduction u/s 10(2)(iii)

Summary

Issues:
1. Disallowance of expenditure incurred in the form of interest paid on borrowing.
2. Interpretation of section 10(2)(iii) of the Income-tax Act, 1922.
3. Determination of whether the investment in a firm was made from borrowed money or the assessee's own funds.

Detailed Analysis:
1. The judgment concerns the disallowance of an expenditure in the form of interest paid on borrowing by an assessee engaged in money-lending and partnership businesses. The Income-tax Officer disallowed a portion of the interest paid on borrowed money, which the Appellate Assistant Commissioner upheld. The Tribunal also declined to interfere, concluding that the borrowed funds were withdrawn from the business funds of the assessee's personal account and not utilized for the money-lending business. The main question referred was whether the assessee is entitled to the allowance of the disallowed amount under section 10(2)(iii) of the Income-tax Act, 1922.

2. The assessee argued that the interest paid on borrowed money and invested in the firm should be allowed as a deduction under section 10(2)(iii). However, the court disagreed, emphasizing that deductions under this provision are only permitted for expenditures related to earning income, profits, or gains. The court clarified that for interest to be deductible under section 10(2)(iii), the borrowing must be for the purpose of a particular business and not for another business. Previous cases cited were distinguished as not directly applicable to the current scenario. The court held that the assessee was not entitled to the deduction under section 10(2)(iii).

3. The second point raised was whether the investment in the firm was made from borrowed money or the assessee's own funds. While this argument was not explicitly raised before the Tribunal, the court allowed the assessee an opportunity to present this point. The court highlighted that if it is proven that the investment in the firm was made from the assessee's own funds and not borrowed money, the application of section 10(2)(iii) may change. The court partially ruled in favor of the assessee, indicating that the Tribunal should re-examine the case based on this new evidence to determine the allowance of interest as a deduction. The judgment concluded by instructing the Tribunal to reconsider the appeal based on this additional point raised by the assessee.