Capital loss on dissolution cannot be set off against business profits; interest on assumed liabilities was not a deductible trading loss.

Interest paid on liabilities taken over on dissolution of partnership businesses was held not to be a deductible trading loss, because the distribution on dissolution related to capital assets and liabilities rather than trading stock or business receipts. The Court distinguished a properly ascertained business loss, which may be set off under the income-tax scheme, from a loss arising on capital distribution after dissolution. That loss was characterised as a capital loss outside the provisions governing loss of profits or gains, so the claimed set-off against profits from the assessee family's other business was not allowable.

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Issues: Whether interest on liabilities taken over on dissolution of partnership businesses could be deducted from the assessee family's profits, and whether any resulting loss could be set off against profits of its other business.

Analysis: The deduction claimed related to interest on borrowings used wholly for the dissolved partnership businesses. The Court accepted that a loss in one business, once properly ascertained under the income-tax provisions, may be set off against profits of another business under the statutory scheme. But the Court distinguished the present case on the ground that, after dissolution, what was distributed was not trading stock or trading results in the course of business, but the capital assets and liabilities of the businesses as capital. A loss arising on such distribution was therefore a capital loss, not a trading loss, and did not fall within the language dealing with loss of profits or gains.

Conclusion: The interest payment could not be treated as a deductible trading loss, and the claimed set-off against the assessee family's other business profits was not allowable.

Final Conclusion: The reference was answered against the assessee, holding that no deduction was allowable in respect of the interest on liabilities assumed on dissolution.

Ratio Decidendi: A loss arising from the distribution of capital assets and liabilities on dissolution of a business is a capital loss, not a trading loss, and cannot be set off against business profits under the provisions governing loss of profits or gains.

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