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TMI Blog1960 (1) TMI 56X X X X Extracts X X X X X X X X Extracts X X X X ..... ng advances to the firms in which he was a partner is allowable as a deduction while computing his individual income for the purpose of assessment? The assessee is a partner in two unregistered firms known as the Nimar Cotton Press Factory and the Nimar Gin Factory, Khandwa. During the material assessment year he borrowed money from three persons and paid interest to them on his borrowings for the purposes of the firm amounting to ₹ 5,086-11-0. In his individual assessment the assessee claimed to deduct this amount of interest from his assessable income. The Income-tax Officer negatived the claim holding that these payments of interest were made by the assessee not for the purpose of his business but that they were made in connec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ence was, there- fore, returned for a proper statement of the case so that the question referred could be answered not on hypothetical grounds but on a finding of fact which could be deduced from the assessment record. The present reference has been made after investigation of facts. The Appellate Tribunal has now observed that there are no partnership deeds of the two unregistered firms, that the only relevant account books are those of the assessee through which all the receipts and expenses of both the firms pass; and that even the daily cash receipts of the firms were brought in the assessee's own account books; and that in this state of affairs it was not possible to say whether the advances were by way of capital or loans. The T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not assessable to tax, then no question of any deduction under sub- section (2) can arise. Deduction under clause (iii) is allowable only in respect of capital borrowed for the purpose of the business, profession or vocation. If, therefore, money is borrowed for the purposes of a business the profits of which are not assessable under the Act, then no deduction can be claimed under clause (iii) in respect of interest on such borrowings. (See In re Provident Investment Co. [1932] 2 Comp. Cas. 312 and Commissioner of In- come-tax, v. Somasundaram Chettiar A.I.R. 1928 Mad. 487 ). Here, the assessee was a partner of two unregistered firms and the money which he borrowed was for the pur- poses of these two unregistered firms. Now, where a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nterest on moneys borrowed against the profits shown by him in respect of his share in the registered firm and the question that was considered by the Bombay High Court was whether it was open to a partner in a registered firm to claim any deduction whatsoever against the amount of profit determined by the by the income-tax authorities as the profits of the firm. While dealing with the case, the learned Chief Justice emphasized the distinction between a registered and an unregistered firm under the Income-tax Act and pointed out that when a firm is unregistered, the unregistered firm is the assessee and the firm itself is liable to pay tax and is assessed like an individual; and that in the case of a the registered firm when the profits ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re is nothing to show that the assessee carried on money-lending as a business which was earning or was capable of earning taxable profits and that it was in the course of this money-lending business that he had made certain advances to the two unregistered firm. This was not the way in which the claim for deduction was sought to be put forward and proved before the Income- tax Officer. In this case it is obvious that for claiming deduction on account of the interest amount paid by him, the assessee should have got the firms themselves to pay the interest amount directly and claimed deduction in respect of that amount at the time of the assessment of the firms themselves. For these reasons our answer to the question stated by the Tribuna ..... X X X X Extracts X X X X X X X X Extracts X X X X
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