Interest Deductibility: borrowed funds must be borrowed and actually used for business to qualify; partners cannot claim firm's disallowed interest.

Disallowance of interest is upheld where borrowed funds were not originally borrowed for and actually utilised in the money lending business; historical use governs attribution of borrowed capital, and advances made by the firm to partners for personal purposes, interest free and not used in the business, cannot be treated as business loans, so the firm's interest deduction is disallowed. Correspondingly, individual partners cannot claim the disallowed interest as a deduction because they did not themselves borrow the sums nor show that withdrawals were capital borrowed for carrying on their separate business activities; partners' claims are rejected.

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Issues: (i) Whether the disallowance of Rs. 71,500 as interest paid by the firm was legally correct; (ii) Whether the sum of Rs. 71,500 disallowed in the firm's assessment is allowable as a deduction under section 10(2)(iii) in the assessments of the individual partners.

Issue (i): Whether the disallowance of interest payment of Rs. 71,500 or any part thereof in the assessment of the firm was right in law.

Analysis: The question turns on whether the moneys borrowed by the firm were borrowed for the purposes of its money-lending business. The historical use of the borrowed funds is determinative; where substantial portions of borrowed capital were advanced interest-free to partners for their personal use and not utilised in the business, such advances cannot be characterised as money-lending in the course of the firm's business. Precedents establish that the test relates to whether money was in origin borrowed for business purposes and was in fact utilised for those purposes at some time; money never so utilised is not attributable to business capital.

Conclusion: The disallowance of Rs. 71,500 is upheld. (In favour of Revenue)

Issue (ii): Whether the sum of Rs. 71,500 paid by the firm towards interest or any part thereof is allowable as a deduction under section 10(2)(iii) in the assessment of the individual partners.

Analysis: The allowance under section 10(2)(iii) is available only for interest paid by the assessee on capital borrowed for the purpose of his business. The partners did not themselves borrow and pay interest on the sums withdrawn from the firm; the withdrawals were used for personal purposes (including payment of income-tax) and were not shown to be borrowings in the sense required by the provision. There is no basis to treat partner drawals as capital borrowed for the partners' business.

Conclusion: The claim for deduction in the individual partners' assessments is rejected. (In favour of Revenue)

Final Conclusion: Both questions referred are answered against the assessee; the firm's disallowance of interest is sustained and the partners are not entitled to claim the disallowed interest in their individual assessments.

Ratio Decidendi: Interest on borrowed capital is allowable only to the extent the capital was borrowed for and actually utilised in the assessee's carrying on of the business; advances by a firm to its partners for personal use, made interest-free and not used in the firm's business, are not business loans and do not render interest on the firm's borrowings deductible in the firm's or the partners' assessments.

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