1988 (2) TMI 428 - HC - Income Tax

Summary

Issues:
- Deductibility of interest paid on funds borrowed for partnership firm from minor's share income under Income-tax Act.

Analysis:
The judgment pertains to a reference under the Income-tax Act concerning three assessment years. The questions referred by the Income-tax Appellate Tribunal revolve around the deductibility of interest paid on funds borrowed for a partnership firm from a minor's share income. The partnership in question involved the assessee and his minor daughter, among others, in a firm named M/s. Krishna Dall and Flour Mill. The minor daughter's share income was initially not included in the assessee's total income for the assessment year 1978-79. However, for subsequent years, it was included under section 64(1)(iii) of the Act. The dispute arose when the assessee claimed that interest on funds borrowed for the partnership should be deducted from the minor daughter's share income before inclusion in his total income. The Income-tax Officer rejected this claim, leading to appeals and subsequent tribunal intervention.

The Appellate Tribunal upheld the assessee's claim, allowing the deduction of interest paid on funds borrowed for the partnership from the minor daughter's share income for all three assessment years. The Tribunal's decision was challenged by the Commissioner, leading to the reference before the High Court. The Revenue contended that the gross income of the minor child should be included in the assessee's total income without any deductions. However, the Court disagreed with this proposition, emphasizing that the share income of the minor child should be determined considering all provisions of the Act.

The Court highlighted Section 67(3) of the Income-tax Act, which allows for the deduction of interest paid by a partner on capital borrowed for investment in the firm from the share income. As the minor partner is considered a partner for all purposes, the provisions of Section 67(3) apply to them as well. Therefore, the interest paid on funds borrowed for the partnership by the assessee on behalf of the minor daughter qualifies for deduction under Section 67(3). The Court affirmed that the interest paid for funds borrowed on behalf of the minor daughter should be deducted before including the resultant income in the assessee's total income under Section 64(1)(iii) of the Act. Consequently, the Court ruled in favor of the assessee, upholding the Tribunal's decision to allow the deduction of interest paid on funds borrowed for the partnership from the minor daughter's share income.