Borrowing cost on partnership investment cannot be disallowed merely because it exceeds the return, and business loss may be set off.

Interest on borrowings used to fund a partner's capital contribution in a partnership firm was held not disallowable merely because the borrowing cost exceeded the return from the firm. In the absence of a finding that the funds were used for non-business purposes or that commercial expediency was lacking, the higher interest rate alone did not justify disallowance. The resulting business loss was also held eligible for set-off against income from other heads, as no statutory bar prevented adjustment of a non-capital loss under the applicable set-off rules. The contrary additions were deleted and full relief was granted to the assessee.

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Issues: (i) Whether the disallowance of interest expenditure on borrowed funds used for investment in the partnership firm could be sustained on the ground of higher interest cost and alleged lack of commercial expediency. (ii) Whether the business loss arising after such interest expenditure could be denied set-off against income from other heads.

Issue (i): Whether the disallowance of interest expenditure on borrowed funds used for investment in the partnership firm could be sustained on the ground of higher interest cost and alleged lack of commercial expediency.

Analysis: The assessee had borrowed funds from banks and private parties and invested them in the capital of a partnership firm in which the assessee was a partner. The interest received from the firm was at the rate permitted in the Act for partner capital, while the borrowed funds carried a higher contractual rate. The record did not show that the borrowing was for non-business purposes or that the investment lacked commercial expediency. The interest on partner capital, remuneration, and related income from the firm were treated as business income, and the Tribunal held that the mere difference in rates did not justify disallowance in the absence of an adverse factual finding showing excessive or unconscionable borrowing cost.

Conclusion: The disallowance of interest expenditure was not justified and was deleted in favour of the assessee.

Issue (ii): Whether the business loss arising after such interest expenditure could be denied set-off against income from other heads.

Analysis: After considering the allowable interest expenditure and related borrowing costs, the remaining computation resulted in a business loss. The Tribunal found no statutory bar preventing such loss from being set off against income from house property and income from other sources. The relevant set-off provisions permitted adjustment of a non-capital loss against other heads of income, and the authorities below had erred in treating the claim as impermissible.

Conclusion: The set-off of the business loss against income from other heads was allowable and the contrary disallowance was deleted in favour of the assessee.

Final Conclusion: The additions sustained by the first appellate authority were reversed, and the assessee obtained full relief.

Ratio Decidendi: Interest on borrowings used for a business-linked investment cannot be disallowed merely because the borrowing cost exceeds the return from that investment, unless lack of commercial expediency or another statutory bar is shown; a business loss computed on that basis remains eligible for set-off where the Act permits it.

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