Partner interest income and related borrowings may qualify for deduction if a direct nexus is established with the capital contribution.

Interest received by a partner from a firm is treated as business income under section 28(v) of the Income-tax Act, and related interest expenditure may be deductible under section 37(1) if a direct nexus with earning that income is established. The disallowance could not be sustained merely by characterising the income as exempt share of profits or by relying on precedent on a different factual matrix. Because the Assessing Officer had not verified whether drawings from one partnership firm were actually used to fund the capital contribution in another, factual examination was required and the matter was remanded for verification of nexus and consequential allowance if proved.

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Issues: Whether interest expenditure incurred on drawings from one partnership firm could be set off against interest income from capital contribution in another partnership firm, and whether the matter required verification of the nexus between the expenditure and the income.

Analysis: Interest received by a partner from a firm falls within section 28(v) of the Income-tax Act, 1961 and expenditure incurred to earn such income may be allowable under section 37(1) if the necessary nexus is established. The disallowance could not be sustained merely by treating the income as exempt share of profits or by applying the cited precedent on a different factual situation. Since the Assessing Officer had not examined whether the drawings from one firm were in fact used for making the capital contribution in the other firm, factual verification was necessary.

Conclusion: The disallowance was not upheld as a matter of law, and the issue was remanded to the Assessing Officer for verification of nexus and consequential allowance, if established.

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