Firm interest deduction barred where payment to a partner fell within the statutory prohibition on interest allowances.

Interest paid by a firm on borrowings linked to a business run through a partner was held outside deduction because section 10(4)(b) of the Income-tax Act, 1922 bars any allowance for interest paid by a firm to a partner. The language of the provision was treated as plain and not limited to payments made to a partner only in the capacity of partner; the argument that the recipient was acting in another capacity was rejected. It was also noted that the Bombay concern had become an independent business after dissolution of the Bombay branch, so its borrowings could not be treated as borrowings of the assessee-firm. The interest was therefore not deductible.

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Issues: Whether interest paid by the assessee-firm on borrowings connected with the Bombay business, and charged through a partner who was also the proprietor of that business, was deductible in computing the firm's income for the assessment year 1959-60.

Analysis: The relevant deduction claim fell within the prohibition contained in section 10(4)(b) of the Income-tax Act, 1922, which disallows any allowance in respect of payment by way of interest made by a firm to any partner of the firm. The language of the provision was held to be plain and not confined to payments made to a partner only in his character as partner. The contention that the partner received the interest in another capacity was rejected. It was further found that the Bombay concern had become an independent business after dissolution of the Bombay branch, and there was no basis to treat its borrowings as borrowings made on behalf of the assessee-firm.

Conclusion: The interest payment was not deductible. The reference was answered in the negative, in favour of the department and against the assessee.

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