Capital distribution not treated as a trading loss; interest on partnership liabilities cannot be deducted against separate business profits.

Interest arose from borrowed capital attributable to two dissolved partnerships and constituted part of capital distribution on winding up rather than a trading expense of the assessee's continuing money lending business; the legal principle applied was that interest is deductible only insofar as it is attributable to the business to which it relates and trading losses of one business may be set off against another, but a capital distribution on dissolution is not a trading loss capable of ascertainment and set off. Consequently the claimed interest was not allowable against the separate money lending business and the deduction was disallowed.

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Issues: Whether Rs. 6,967 being interest on liabilities allotted to the assessee on dissolution of two firms is allowable as a deduction against profits and gains of the assessee's separate money lending business for the year of account.

Analysis: The interest claimed arose from borrowed capital raised for the two dissolved partnership businesses and was part of the liabilities distributed to the assessee on dissolution. The claimed amount was not a trading expense of the assessee's continuing money lending business but formed part of the capital distribution arising on winding up and partition of the partnership estates. Section 10(2)(3) permits deduction of allowable interest in computing profits or gains of the business to which the interest relates; if that business shows a trading loss such loss may be set off under Section 24 against profits of other businesses. Where, however, the event is a distribution of partnership assets and liabilities on dissolution, the distribution is capital in nature and not a trading loss capable of being ascertained under Section 10 and set off under Section 24.

Conclusion: The sum of Rs. 6,967 is not deductible from the profits and gains of the assessee's separate money lending business; the claim is negative and the deduction is disallowed.

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