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TMI Blog2008 (2) TMI 19X X X X Extracts X X X X X X X X Extracts X X X X ..... ent on the ground that the said advances were not given from the firm's Own Funds but from interest bearing loans taken by the assessee-firm from third parties. Accordingly, the assessee's claim for deduction under Section 36(1)(iii) was disallowed by the Department for the AY 1992-93. However, vide order dated 3.1.03, the Tribunal deleted the disallowance saying that the assessee had given such advance from its Own Funds. 5. In the next AY 1993-94, the same situation took place. Once again vide order dated 1.1.03, the Tribunal deleted disallowance for AY 1993-94. It is important to note that the Department accepted the orders passed by the Tribunal in favour of the assessee for both the AYs 1992-93 and 1993-94. At the same time, we need to emphasise, at this stage, that the interest free advance given to the sister concern was repaid on year to year basis. The said advance/loan got finally repaid in AY 1997-98. 6. During the AY 1994-95 no further advances were made by the assessee-firm in favour of its concerns. However, during AY 1995-96, a small i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... % per annum. According to learned counsel, Section 40(b)(iv) talks about statutory deduction and that the question of disallowance comes in only to the extent that payment of interest to the partner exceeds 12/18% per annum. In this case, according to learned counsel, all the conditions of Sections 40(b)(iv) have been satisfied and, therefore, the assessee was entitled to the benefit of deduction thereunder. In this connection, it was further argued that deduction under Section 40(b)(iv) is not for expenditure; that it was a statutory deduction and that the contribution by the partner to the firm cannot be equated to a loan to the firm and that the former falls only under Section 40(b)(iv) and, therefore, the said Section 40(b) was a stand-alone section having no connection with the provisions of Section 36(1)(iii) of the 1961 Act. Further, according to learned counsel, in this case Section 36(1)(iii) had no application as this was a case of payment of interest to the partner on his capital contribution which cannot be equated to monies borrowed by the firm from third parties, hence the present case fell only under Section 40(b)(iv) and not under Section 36( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... interest, salary, bonus, commission or remuneration made by the firm to any partner of the firm. Explanation 1 : Where interest is paid by a firm to any partner of the firm who has also paid interest to the firm, the amount of interest to be disallowed under this clause shall be limited to the amount by which the payment of interest by the firm to the partner exceeds the payment of interest by the partner to the firm. Explanation 2 : Where an individual is a partner in a firm on behalf, or for the benefit, of any other person (such partner and the other person being hereinafter referred to as "partner in a representative capacity" and "person so represented" respectively,)- (i) interest paid by the firm to such individual or by such individual to the firm otherwise than as partner in a representative capacity, shall not be taken into account for the purposes of this clause; (ii) interest paid by the firm to such individual or by such individual to the firm as partner in a representative capacity and interest paid by the firm to the person so represented or by the person so represented to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... including a firm has to establish, in the first instance, its right to claim deduction under one of the sections between Sections 30 to 38 and in the case of the firm if it claims special deduction it has also to prove that it is not disentitled to claim deduction by reason of applicability of Section 40(b)(iv). Therefore, in the present case, the assessee was required to establish in the first instance that it was entitled to claim deduction under Section 36(1)(iii) and that it was not disentitled to claim such deduction on account of applicability of Section 40(b)(iv). It is important to note that Section 36(1) refers to Other Deductions whereas Section 40 comes under the heading Amounts not Deductible. Therefore, Sections 30 to 38 are Other Deductions whereas Section 40 is a limitation on that deduction. It is important to note that Section 28 to 43C essentially deal with Business Income. Sections 30 to 38 deal with Deductions. Sections 40A and 43B deal with Business Disallowances. Keeping in mind the said scheme the position is that Sections 30 to 38 are deductions which are limited by Section 40. Therefore, even if an assessee i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for AY 1992-93, that the assessee had given interest free loans from its Own Funds and not from interest bearing loans taken by the firm from third parties and consequently the assessee was entitled to claim deduction under 36(1)(iii). In other words, the Tribunal held that loans were given for business purposes. Similarly, for AY 1993-94, the Tribunal had taken the view that the said loans given to the firm's sister concerns were for business purposes. Accordingly, the Tribunal had deleted the disallowances during the AYs 1992-93 and 1993-94. It is equally true that for the AY 1994-95 the Tribunal took a contrary view in view of change in law brought about by Finance Act 1992. Prior to 1.4.93 payment of interest to the partner had to be added back to the assessable income of the firm whereas after Finance Act 1992 such payment became an item of deduction for computing the assessable income of the firm and it became part of the business income of the partner. In view of this change of law, the Tribunal disallowed payment of the interest in the present case for AYs 1994-95, 1995-96, 1996-97 and 1997-98. However, the point which has been lef ..... X X X X Extracts X X X X X X X X Extracts X X X X
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