Interest deduction for borrowings used to fund unregistered firms is unavailable when profits are taxed at the firm level.

Interest on borrowings is deductible under section 10(2)(iii) only when the capital is borrowed for a business, profession or vocation whose profits are taxable in the assessee's own hands. Where a partner borrows money from outsiders and uses it to advance funds to unregistered firms that are separately assessed, the borrowing is not for a separately taxable business of the partner. The partner's share of profits from those firms is not taxed in his individual assessment once tax is paid by the firms, and the deduction is therefore unavailable. The court distinguished the position of a partner in a registered firm from that in an unregistered firm.

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Issues: Whether interest paid by an assessee on money borrowed from outsiders for making advances to two unregistered firms in which he was a partner was deductible in computing his individual taxable income.

Analysis: Deduction under section 10(2)(iii) is confined to interest on capital borrowed for the purposes of a business, profession or vocation whose profits are taxable in the assessee's hands. Where the borrowing is for the use of unregistered firms that are themselves assessed as the units of assessment, the partner's share of profits is not taxable in his individual assessment once tax has been paid by the firms. On the facts found, the borrowings were utilised for the two unregistered firms and not for a separately taxable business carried on by the assessee. The reliance on the decision concerning a registered firm did not assist the assessee, because the statutory position of a partner in a registered firm differs materially from that in an unregistered firm.

Conclusion: The assessee was not entitled to deduct the interest paid on borrowings used for advancing money to the two unregistered firms.

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