1973 (4) TMI 32 - HC - Income Tax

Interest paid on the loans nad litigation expenses - Whether on the facts and in the circumstances of the case the assessee was entitled to the deduction of interest and litigation expenses from the share of the profit derived by him from Niranjan Lal Bhargava & Co. ? - Question answered in the affirmative

Summary

Issues:
- Deduction of interest and litigation expenses from the share of profit derived by the assessee from a registered firm.

Analysis:
The judgment pertains to a reference made by the Income-tax Appellate Tribunal regarding the deduction of interest and litigation expenses by the assessee from the share of profit derived from a registered firm. The assessee, in the assessment year 1956-57, claimed a deduction of interest on loans and litigation expenses as a loss in the money-lending business. The Income-tax Officer and the Appellate Assistant Commissioner rejected this claim, stating that the loans were not raised in connection with the assessee's business in the previous year. However, the Tribunal accepted the claim under section 10(2)(xv) of the Act, allowing the deduction of interest and litigation expenses from the share income of the assessee from the firm. The Tribunal remanded the case to ascertain the exact amount of interest for the previous year. The Commissioner of Income-tax challenged this decision, leading to the reference.

The assessee had taken loans from the Allahabad Bank and the Bombay Life Insurance Company in 1949, used for the cinema business. The loans were invested in the business, mainly for advances to film distributors supplying films to the assessee's cinemas. The Tribunal found that the loans were raised for business purposes, making the interest payable on the loans an allowable expenditure under section 10(2)(xv) of the Act. The change in the business structure to a partnership firm did not affect the eligibility for deduction, as the loans were retained by the assessee, and the deduction was claimed against the share income, not the firm's profits as a whole. The court upheld the Tribunal's decision, emphasizing that the legal position did not change with the business transfer to a partnership firm.

In conclusion, the court answered the question in the affirmative, in favor of the assessee, allowing the deduction of interest and litigation expenses from the share income derived from the registered firm. The assessee was awarded costs amounting to Rs. 200.