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TMI Blog1953 (5) TMI 24X X X X Extracts X X X X X X X X Extracts X X X X ..... see-firm had also lent money to the firm for purposes of carrying on its business and had from time to time borrowed money from it. There was a khata in the name of each partner which showed the amount of interest paid by the firm to the partner on the amount borrowed from him and also interest received from the partner on any amount borrowed by him. The total amount paid to the partners as interest on amounts borrowed from them was ₹ 19,712, while the amount received from the partners as interest on monies borrowed by them was ₹ 7,931. The assessee had in his return deducted from its income the sum of ₹ 19,712 paid as interest to the partners. The Income-tax Officer disallowed the hotel charges paid by the partners, as al ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al Sohanlal ₹ 3,522, the total amount thus paid as interest to the partners on the capital borrowed from or invested by them came to ₹ 19,712. It appears from the accounts that the partners withdrew or borrowed money from the firm on which they were charged interest by the firm. The amount of interest thus paid by Jagannath Mahadeo Prasad was ₹ 5,699, Kamta Prasad ₹ 1,439 and Gangadin Kedarnath ₹ 793. The total amount of interest received by the firm from the partners for money borrowed by them from the firm was ₹ 7,931. The Income-tax Officer added back the whole amount of ₹ 19,712 paid by the firm to the partners for money borrowed from them without deducting the sum of ₹ 7,931, the inter ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t make it perfectly clear that the amounts could not be deducted in computing profits or gains of the partnership. The relevant portion of Section 10(2) (iii) is as follows:- (2) Such profits or gains shall be computed after making the following allowances, namely:- (iii) in respect of capital borrowed for the purposes of the business, profession or vocation, the amount of the interest paid: Provided that no allowance shall be made........in the case of a firm, for any interest paid to a partner of the firm; . Again Section 10(4)(b) provides that .....nothing in clause (xv) of sub-section (2) shall be deemed to authorise-(b) any allowance in respect of any payment by way of interest, salary, commission or remuneration ma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ry and was entitled to one-fourth share of the profits. The factory was assessed to income-tax for its profits in the year 1937-38. The point raised was whether the appellant could be said to have been assessed to income-tax as the factory of which he was a partner had been assessed to income-tax. The case of Rm.Ar.Ar.Rm. Arunachalam Chettiar v. Commissioner of Income-tax, Madras [1936] 4 I.T.R. 173, was also relied upon. That was a case in which the question arose whether a partner could undertake the liability to pay the losses incurred by another partner and claim to set it off against his profits from other business. Another point in the case was whether the losses incurred by the other partner could be treated as bad debt in the yea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... artner, therefore, is entitled to charge interest under the Partnership Act at such rate as may be agreed upon between the partners and in the absence of an agreement six per cent. per annum for all sums advanced by him beyond the amount of capital he had agreed to subscribe. The provisions of the Income-tax Act quoted above make it clear that the assessee-firm is not entitled to claim a deduction for any interest paid by it to its partners. If the partner has borrowed money from the partnership, it only means that he has diverted to his own personal use a part of the capital which might have been invested for business purposes and has agreed to compensate the partnership by paying interest for it. There appears to be no reason why the inte ..... X X X X Extracts X X X X X X X X Extracts X X X X
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