1968 (8) TMI 41 - HC - Income Tax

High Court ruling: Interest payment to partner not deductible under Income-tax Act

The High Court of Kerala ruled against the assessee, holding that the interest payment to a partner was not a permissible deduction under section 10(4)(b) ... Dissolution of firm - Interest on borrowed money - allowability as deduction Issues:Interpretation of section 10(4)(b) of the Income-tax Act, 1922 regarding deduction of interest payment to a partner. Determination of whether interest payment by a firm to one of its partners is a permissible deduction. Analysis of whether payments made by the assessee by way of interest to a partner were in his capacity as a partner or as the proprietor of another business. Determination of whether borrowings made by another business on behalf of the assessee qualify for deduction.Analysis:The High Court of Kerala addressed a reference under section 66(2) of the Income-tax Act, 1922 concerning the assessment year 1959-60. The issue revolved around the correctness of allowing interest payment of Rs. 66,644 by the assessee-firm to one of its partners, S. Veeriah Reddiar. The firm conducted textile business in Alleppey, with a partner who was previously the sole proprietor of a losing concern in Bombay. The interest payment in question was related to borrowings made by the partner for purchasing goods for the assessee. The Income-tax Officer initially disallowed the deduction claimed by the assessee, leading to subsequent appeals and a remand to investigate the relationship between the businesses.The court examined the provisions of section 10(4)(b) of the Income-tax Act, which restricts allowances for payments of interest, salary, commission, or remuneration made by a firm to any partner. The assessee contended that the interest payments were made by the partner in his capacity as the proprietor of the Bombay concern, not as a partner of the firm, thus not falling under the purview of section 10(4)(b). However, the court relied on precedent to emphasize that the provision does not distinguish between payments made to a partner in different capacities, affirming that the restriction applies broadly to all such payments.Furthermore, the court rejected the argument that the borrowings made in Bombay, for which interest was paid, were on behalf of the assessee. It was established that the Bombay concern operated independently and ceased to be part of the assessee's business. There was no evidence indicating authorization for the Bombay concern to borrow on behalf of the assessee. Consequently, the court ruled in favor of the department, denying the deduction claimed by the assessee. The judgment emphasized adherence to the clear language of the tax law without room for interpretation or implication, ultimately upholding the disallowance of the interest payment deduction.In conclusion, the High Court of Kerala decided against the assessee, holding that the interest payment to a partner was not a permissible deduction under section 10(4)(b) of the Income-tax Act, 1922. The judgment underscored the strict application of tax laws without room for interpretation beyond the explicit provisions. The court's decision was based on the lack of authorization for borrowings made by another business on behalf of the assessee, leading to the denial of the deduction claimed by the firm.