TaxTMI 
TaxTMI 
1988 (11) TMI 153
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....he excess drawings in their share of profits at 12 per cent per annum. The assessee had a current account with a firm. The relevant entries of the same are as follows : Date Particulars Debit Credit 1st, April 1979 By balance b/f 4,206.35 31st, March 1980 By interest 504.80 To net loss for the year 78,960.17 --------- -------- &....
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....bsp; part 20,000.00 1st September By cash share 1982 capital refunded by Vishaka Builders 20,000.00 31st March 1983 To interest 25,046.68 received By profit for the ....
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....s view and upheld the disallowance. 4. In the further appeal before us it was contended on behalf of the assessee that the authorities below had not properly appreciated the claim. It was argued that the share of the assessee in the income of the firm had to be assessed in the hands of the assessee as income from business and in so doing the interest paid by the assessee which went into the computation of such income should be allowed as a deduction. It was argued that under the terms of the partnership deed the assessee was bound to pay interest and therefore it was an expenditure laid out for the purpose of the business which was being carried on under the terms of the partnership deed. In the alternative, it was claimed that if the assessee had not paid this interest he would have had to borrow capital and make good the losses which had been debited to his account and, therefore, this was the cost of the capital which has to be borne by the assessee and should be taken into account in finding out his real income from the firm. It was submitted that, in any view of the matter, the deduction should be allowed. 5. On the other hand, it was contended on behalf of the Revenue t....
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....y employed. It is also well known that the Court while construing the contract has to put itself in the position of the contracting parties, as is said to sit in their arm-chairs and divining their intention as expressed in words in which the contract is couched. Thus, we have to accept the contention of the assessee that he was bound to pay this interest which was debited to his account. 7. The question then arises is whether the interest so debited is an admissible deduction in computing his share of profits from the firm ? No doubt, it is not interest paid on any capital directly borrowed and invested in the business of the firm. But if the assessee were to avoid this payment, he would have had to provide the funds which would have required the assessee having to borrow the funds from some other persons and paying interest thereon. Since he has not provided the funds, the firm has borrowed funds and had paid interest. In the circumstances, it is clear that this interest is really the cost of the capital borrowed for making up the losses which has been debited to the assessee's account as a reimbursement, so to say. In other words, this is interest paid on capital indirectly b....
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.... to us not merely to look at the documents themselves, but also to consider the surrounding circumstances so as to arrive at a conclusion as to what was the real nature of the transaction from the point of view of two businessmen who were carrying out this transaction. In all taxation matters more emphasis must be placed upon the business aspect of the transaction rather than on the purely legal and technical aspect." Considering the transaction from this point of view, it is clear that the interest debited was essentially reimbursement of expenditure incurred by the firm for capital borrowed for the purpose of its business and hence expenditure incurred for earning his share of income from that business. On the other hand, if this objection is to be sustained on the construction of clause 5 of the Partnership Deed that it did not cover any debits made for share of loss in the current account, then the addition of this interest to the total income of the firm would have to be reversed with the result that the assessee would be entitled to the deduction of the amount interest he computation of the income of the firm itself. We have already held that the terms of the partnership d....