Separate assessment of firm and partner bars deduction of interest paid on personal withdrawals from share income.

Where the Income-tax Act treats a firm and its partners as distinct assessable entities, interest paid by a partner to the firm on personal withdrawals is real income of the firm and cannot be deducted from the partner's share of income. The doctrine of real income did not justify reducing the partner's allocated share, because the amount had accrued to and been assessed in the firm's hands before forming part of the partner's share income. A plea of impermissible double taxation also failed, as the statutory scheme permitted separate assessment of the firm and the partners. The deduction claim was rejected.

---

---

Issues: Whether the assessee was entitled to deduct one-third of the interest paid by her to the firm from the share income allocated to her.

Analysis: The Income-tax Act treats a firm and its partners as distinct taxable entities. Interest paid by partners to the firm on withdrawals for personal expenses arose from a genuine commercial transaction and constituted real profit in the hands of the firm. The doctrine of real income did not apply to reduce the partners' share income, because the amount had first accrued to and been assessed in the firm's hands and then formed part of the partners' allocated share income. The statutory scheme also permitted assessment of both the firm and the partners, so the plea against double taxation could not succeed.

Conclusion: The assessee was not entitled to deduct the interest from the share income, and the answer was in the negative, against the assessee.

Ratio Decidendi: Where the statute treats the firm and the partners as separate assessable entities, interest paid by partners to the firm on personal withdrawals is taxable real income of the firm and cannot be deducted from the partners' share income on a plea of real income or impermissible double taxation.

---