9911796707
TMI Blog1988 (11) TMI 153X X X X Extracts X X X X X X X X Extracts X X X X ..... uch capital shall not carry any interest. Clause 5 however stated that if any additional funds are required for the partnership business the partners may contribute such amounts from themselves which shall carry interest. This clause further stated that interest shall be allowed on all loan accounts of the partners at 12 per cent and interest shall be charged on the excess drawings in their share of profits at 12 per cent per annum. The assessee had a current account with a firm. The relevant entries of the same are as follows : Date Particulars Debit Credit 1st, April 1979 By balance b/f 4,206.35 31st, March 1980 By interest 504.80 To net loss ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... alance b/f 1,71,930.83 ----------- ----------- 2,45,435.65 2,45,435.65 To balance b/f 1,71,930.83 3. In computing the income of the firm of the previous year ended 31st March 1983, corresponding to the assessment year 1983-84, the interest of Rs. 25,047 paid by the assessee to the firm was added to the total income. There was also the deduction of the interest of Rs. 3,84,803.74 paid by the firm on capital borrowed by it for carrying on the business. The net profit ascertained in the hands of the firm was allocated among the partners and the share of the assessee came to Rs. 58,158. The assessee claimed that out of this share income t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed that, in any view of the matter, the deduction should be allowed. 5. On the other hand, it was contended on behalf of the Revenue that the partnership deed required the charging of interest only on withdrawals and since the assessee had not withdrawn any amount, there was no question of making any debit for interest under the terms of the deed of partnership. Secondly, it was argued that no capital had actually been borrowed and invested in business and, therefore, the assessee was not entitled to deduction under section 36(1) (iii). Thirdly it was argued that if the assessee had not chosen to follow the procedure of borrowing from outside and paying interest thereon to become eligible for the deduction, the assessee would not be entit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... you have done under such a deed, and I will tell you what that deed means", is quoted. The reason for that rule is said to be that in the lapse of time and change of manners the words used in the instrument may have acquired a meaning different from that which they bore when originally employed. It is also well known that the Court while construing the contract has to put itself in the position of the contracting parties, as is said to sit in their arm-chairs and divining their intention as expressed in words in which the contract is couched. Thus, we have to accept the contention of the assessee that he was bound to pay this interest which was debited to his account. 7. The question then arises is whether the interest so debited is an ad ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e disputed that the assessee was carrying on business in partnership. See Commissioner, Bihar v. Ramniklal Kothari (1969) 74 ITR 57 (SC). When the share of income is computed the interest paid by the assessee has been taken into account. Therefore there is a clear nexus between the payment of interest and the earning of the income both of which arise only under the terms of the agreement of partnership. Hence, this expenditure attracts the provisions of section 37 which allows the deduction of any expenditure laid out for the purpose of the business not being in the nature of capital expenses or personal expenses of the assessee. It is not the case of the Revenue that this expenditure was capital expenditure and a look at the current accoun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of its business and hence expenditure incurred for earning his share of income from that business. On the other hand, if this objection is to be sustained on the construction of clause 5 of the Partnership Deed that it did not cover any debits made for share of loss in the current account, then the addition of this interest to the total income of the firm would have to be reversed with the result that the assessee would be entitled to the deduction of the amount interest he computation of the income of the firm itself. We have already held that the terms of the partnership deed should be construed to authorise the deduction of this interest. Therefore, we have to hold that it was also an expenditure laid out for the purpose of the business ..... X X X X Extracts X X X X X X X X Extracts X X X X
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