Deductibility of interest on borrowed capital affirmed, while firm-level or personal audit and stationery expenses are not allowable to the partner.

Entitlement to deduct interest was determined by whether the interest was incurred on capital borrowed and actually applied to the partnership business; because the assessee's borrowings were debited and used as capital, the interest satisfied the statutory business nexus and was allowed. By contrast, audit fees and stationery incurred for ascertaining the firm's income or preparing the individual's assessment were treated as either firm-level expenditures or personal expenses and therefore could not be claimed again by the partner; those items were disallowed. The appeal was allowed in part on these grounds.

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Issues: (i) Whether the assessee was entitled to deduct interest of Rs. 2,965 paid on borrowings as against her share of partnership income; (ii) Whether the assessee was entitled to deduct audit fees of Rs. 150 and stationery expenses of Rs. 24 against her share of partnership income.

Issue (i): Entitlement to deduction of interest of Rs. 2,965 paid on borrowings for the purpose of investment against share income from the partnership.

Analysis: The record shows that the sum of Rs. 90,000 was debited to the assessee's account and invested as capital in the partnership, and that interest of Rs. 2,965 was charged on the debit balance arising from borrowings used for that investment. The relevant statutory test is whether the interest was incurred on capital borrowed for the purpose of the business within the meaning of Section 10(2)(iii) of the Act. The availability of other funds in the assessee's account or an alternative method of financing does not negate that the borrowing was made and used for the investment purpose; therefore the interest payment satisfies the statutory nexus to the business.

Conclusion: The interest payment of Rs. 2,965 is allowable as a deduction in favour of the assessee.

Issue (ii): Entitlement to deduction of audit fees of Rs. 150 and stationery expenses of Rs. 24 against the assessee's share of partnership income.

Analysis: The audit fees and stationery expenses related to ascertaining the firm's income and preparing the assessee's personal accounts for assessment. Such expenses are either allowable in the firm's assessment or are personal expenses incurred for preparing returns and not expenditure incurred in connection with the business from which the income was derived. No provision of the Act supports allowing these items again to the individual assessee.

Conclusion: The audit fees of Rs. 150 and stationery expenses of Rs. 24 are not allowable and are disallowed.

Final Conclusion: The appeal is allowed in part-interest paid is allowable to the assessee while the audit and stationery expenses are disallowed.

Ratio Decidendi: Interest on capital borrowed and actually applied to the business is deductible under Section 10(2)(iii) of the Income-tax Act, 1922, whereas expenses of a personal nature or expenses already subsumed in the firm's assessment are not allowable to the individual partner.

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