1987 (2) TMI 105 - AT - Income Tax

Partner's Interest Deduction Denied Without Firm Share Income under Income-tax Act

The Appellate Tribunal held that the deduction for interest paid by a partner on capital borrowed for investment in a firm is not allowable under sections ... Partner, Computation Of Share In Income Of Firm, Interest On Borrowed Capital Issues:1. Allowance of deduction for interest amount paid by the assessee on capital borrowed for investment in the firm.2. Interpretation of relevant provisions of the Income-tax Act, 1961 regarding deduction of interest paid by a partner on capital borrowed for investment in the firm.3. Applicability of section 67(3) in computing a partner's share in the income of the firm when there is no share income from the firm.Detailed Analysis:The appeal before the Appellate Tribunal ITAT CALCUTTA-C involved the issue of whether the interest amount of Rs. 29,195 paid by the assessee on capital borrowed for investment in a firm should be allowed as a deduction from the business income. The assessee, a partner in a firm, had no share income from the firm for the relevant assessment year. The Income-tax Officer (ITO) disallowed the deduction claimed by the assessee, stating that without income from the firm, there was no justification for allowing the interest paid on borrowed capital. The Appellate Assistant Commissioner (AAC) directed the ITO to allow the deduction, considering it as a business loss under sections 70(1) and 71(1) of the Income-tax Act, 1961.The department contended that deduction under section 67(3) is allowable only if the partner has income by way of the firm's profit. The department relied on a decision of the Madras High Court to support their argument. On the other hand, the assessee's representative supported the AAC's order, citing a decision of the Delhi High Court. The Tribunal considered the legal provisions and previous court decisions on similar matters.The Tribunal analyzed the provisions of section 67(3) which allow deduction for interest paid by a partner on capital borrowed for investment in the firm. It was observed that section 67(3) requires there to be share income from the firm to justify the deduction. The Tribunal differentiated between section 57(iii) and section 67(3, stating that while the former allows deduction based on the purpose of expenditure, the latter specifically ties the deduction to the partner's share of the firm's profit.The Tribunal referred to a decision of the Madras High Court which held that deduction under section 67(3) is only permissible when there is share income from the firm. Additionally, the Tribunal cited a Supreme Court decision emphasizing that if an expenditure cannot be considered for computing the assessee's income, it cannot be allowed as a deduction. As the firm in question was not assessed for the relevant year and the assessee had no share income, the Tribunal concluded that the deduction for interest paid on borrowed capital was not allowable under either section 67(3) or section 36(1)(iii).Ultimately, the Tribunal allowed the department's appeal, setting aside the AAC's order and restoring that of the ITO.