1991 (12) TMI 38 - HC - Income Tax

High Court allows deduction of interest on loan for building renovation used by firm partner for business purposes

The High Court ruled in favor of the assessee, allowing the deduction of interest paid on a loan taken for renovating a building used by a firm in which ... Interest On Borrowed Capital Issues:1. Interpretation of whether interest paid on a loan taken for construction of shop premises, used by a firm in which the assessee was a partner, can be allowed as a deduction from the assessee's business income.Analysis:The case involved a Hindu undivided family assessee with business income from two firms, one of which used a building owned by the assessee for its business. The assessee took a loan for renovating the building, and the interest paid on the loan was claimed as a deduction from business income. The Income-tax Officer and the Appellate Assistant Commissioner disallowed the claim, stating a remote nexus between the business activities and building construction. However, the Tribunal allowed the deduction, considering the building as a business asset of the assessee. The Revenue challenged this decision, leading to the reference to the High Court.The Revenue argued that since the shop was used by the firm, not the assessee directly, the interest paid cannot be considered business expenditure under section 36(1)(iii) of the Income-tax Act. The High Court analyzed the situation, emphasizing that the business of the partnership was also the business of the assessee, despite being in partnership with others. The Court noted that the firm, for income tax purposes, is treated as a separate entity but ultimately the partners bear the tax burden, indicating a connection between the firm's business and the partners' individual business.The Court concluded that the user of the building by the firm, in which the assessee was a partner, should be considered as user by the assessee for business purposes. It highlighted that any expenditure incurred by a partner for the firm's business should be allowed as a deduction. Even if the borrowed amount did not strictly fall under section 36(1)(iii), the interest paid could be allowed as a deduction under section 37 as it was expended wholly and exclusively for business purposes. Therefore, the Court answered the reference question in favor of the assessee, allowing the deduction of interest paid on the loan for renovating the building used by the firm.In conclusion, the High Court's judgment clarified that the interest paid on a loan taken for a building used by a firm, in which the assessee is a partner, can be considered a deductible business expenditure if the asset is utilized for the firm's business activities, aligning with the business interests of the individual partner.