1990 (2) TMI 23 - HC - Income Tax

Interest on Overdrawn Amounts Not Deductible; Share Income Deemed Real Income

C. Bhaskaran Nair Versus Commissioner Of Income-Tax

C. Bhaskaran Nair Versus Commissioner Of Income-Tax - [1990] 185 ITR 15, 86 CTR 48, 53 TAXMANN 494 Issues Involved:1. Deduction of interest paid by the assessee to the firm from the total income.2. Deduction of interest paid on the amount debited towards the price of share purchased.3. Applicability of Section 67(3) to interest paid by a partner to the firm.4. Applicability of Section 37 to the interest payment.5. Treatment of the share received from the firm as the assessee's real income.Detailed Analysis:1. Deduction of Interest Paid by the Assessee to the Firm from the Total Income:The assessee, a partner in two firms, claimed the interest paid on overdrawn amounts as an allowable deduction. The Income-tax Officer disallowed this claim, stating that the interest was not incurred for earning the share income. The Appellate Assistant Commissioner upheld this decision, noting that the interest was paid as per the partnership agreement and not for earning profit. The Tribunal also dismissed the appeal, agreeing that the interest was not paid on capital borrowed for business purposes but was on the debit balance due to losses incurred by the firms. Consequently, the High Court answered in the negative, favoring the Revenue, and against the assessee.2. Deduction of Interest Paid on the Amount Debited Towards the Price of Share Purchased:The High Court refused to answer this question, stating that it did not arise from the decision of the Appellate Tribunal.3. Applicability of Section 67(3) to Interest Paid by a Partner to the Firm:Section 67(3) allows for the deduction of interest paid by a partner on capital borrowed for investment in the firm. However, this case involved interest on overdrawn amounts, not borrowed capital. The Tribunal and the High Court found that Section 67(3) was not applicable as the interest was not for capital borrowed for investment in the firm. The High Court answered affirmatively, favoring the Revenue and against the assessee.4. Applicability of Section 37 to the Interest Payment:Section 37 is a residuary section that allows for the deduction of any expenditure not covered by Sections 30 to 36, provided it is laid out wholly and exclusively for business purposes. The High Court noted that Section 37(1) could apply to amounts spent exclusively to earn a partner's share of profits. However, in this case, it was agreed that the interest payment was not for earning profit. Therefore, Section 37 was not applicable. The High Court answered affirmatively, favoring the Revenue and against the assessee.5. Treatment of the Share Received from the Firm as the Assessee's Real Income:The High Court considered various precedents and concluded that the interest paid by the partner to the firm on overdrawals is not an allowable deduction in the individual assessment of the partner's income. The doctrine of real profits was also considered, and it was determined that the interest paid was a commercial transaction that earned profits for the firm. The High Court answered affirmatively, favoring the Revenue and against the assessee.Conclusion:The High Court's judgment concluded that the interest paid by the assessee to the firms on overdrawn amounts is not deductible from the total income. Sections 67(3) and 37 are not applicable to such interest payments, and the share received from the firm is treated as the assessee's real income. The judgment was in favor of the Revenue and against the assessee on all applicable questions.