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TMI Blog1990 (2) TMI 23X X X X Extracts X X X X X X X X Extracts X X X X ..... ection which applies to interest paid by a partner to the firm ? (4) Whether, on the facts and in the circumstances of the case, the Tribunal is right in law in holding that the provisions of section 37 would not apply to the particular case ? (5) Whether, on the facts and in the circumstances of the case, the Tribunal was right in law and facts in treating the portion of the share received by him from the firm as the assessee's real income ?" The assessee is a partner of two firms, namely, South Indian Timber Industries, Kudamaloor and Kumaranalloor Tile Works, Kottayam. The previous year ended on March 31, 1978, relevant to the assessment year 1979-80. The assessee claimed interest paid by him to the firms on the overdrawn amounts from the firm as an allowable deduction. According to the assessee, the partnership deeds of the two firms stipulated payment of interest at 9% per annum on the debit balances. The interest paid was treated as income of the firms. The amount of interest paid to South Indian Timber Industries was Rs. 26,408 and to Kumaranalloor Tile Works was Rs. 103. Therefore, the assessee claimed these amounts of interest as expenditure allowable in the computation ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the payment of interest by a partner is concerned, it is governed only by the provisions of section 36 (1)(iii) of the Act. In that view of the matter, the Tribunal held that section 37 of the Act would not apply. The Tribunal further observed that the interest payment in question could not be considered to be interest paid on capital borrowed as it was only interest on the debit balance of the partner and such debit balance has arisen on account of the losses sustained by the firm. The Tribunal dismissed the appeal on the aforesaid reasoning. It is thereafter that the Tribunal has referred the above questions of law at the instance of the assessee. Heard counsel. Question No. 2 mentioned hereinbefore relates to the claim for deduction of the amount of interest paid towards the price of the share purchased from T. Sumathy Amma and Prabhakaran Nair. The said question does not arise from the decision of the Appellate Tribunal and, therefore, we refuse to answer the said question. Questions Nos. 1, 3, 4 and 5 relate to the claim for deduction of interest paid by the assessee to the two firms in accordance with the partnership agreement in respect of the overdrawals by the assessee. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the firms is an allowable deduction under section 36(1)(iii) of the Act. Admittedly, section 36(l)(iii) will apply only if the amount of interest is paid in respect of capital borrowed for the purpose of the business or profession. In this case, the Income-tax Officer found that the interest paid to the firms was for overdrawal from the firms. Before the Appellate Assistant Commissioner, it was agreed by the assessee's representative that the interest paid is not for earning profit. The Tribunal also found that the interest payment is not for capital borrowed as the interest payment is only on the debit balance of the partner and such debit balance arose on account of the loss sustained by the firms. Therefore, section 36(1)(iii) cannot have any application to the case. The next question is whether section 67(3) of the Act will apply. Section 67(3) also will not apply to this case as the section says that any interest paid by a partner on capital borrowed by him for the purposes of investment in the firm shall be deducted from the share in computing his income chargeable under the head "Profits and gains of business or profession". The only other section that is pressed into serv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reme Court held that the receipt by the partner is business income for the purpose of section 10(1), and being business income, expenditure necessary for the purpose of earning that income and appropriate allowances are deductible therefrom in determining the taxable income of the partner. It was open to the partner to claim a deduction provided he satisfies the taxing authority that such deduction represents necessary expenditure, the expenditure being incurred in order to enable him to earn the profits which are being subjected to tax. After referring to Basantlal Gupta v. CIT [1963] 50 ITR 541 (Mad), the Supreme Court held (at p: 60): "An allowance under section 10(2) will be permissible in proper cases even after the share has been ascertained if the expenditure sought to be deducted was incurred by the partner solely and exclusively for the purpose of earning his share in the income of the firm." This case has no application to the facts of this case. The decision was rendered with respect to the provisions contained in the 1922 Act. The next decision referred to by counsel on behalf of the assessee is CIT v. Sohan Lal Nyyar [1974] 95 ITR 90 (Delhi). In that case, under an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (iii) of the Act. Since there was no borrowing of money by the assessee for the purpose of investing the same in the partnership business, on the language of section 67(3), it was found that the interest payment is not entitled to be deducted. But the court further observed that section 67(3) is not exhaustive. Under section 37(1) of the Act the expenditure incurred by the assessee by way of payment of interest on the unpaid purchase money is an allowable deduction as the expenditure was incurred wholly and exclusively for the purpose of business and it did not fall within the ambit of sections 30 to 36. This decision also will not help the assessee's case here as the interest paid by the assessee was not for the purpose of the business nor was it for the purpose of investment in the firm. Counsel for the Revenue referred to the decision in CIT v. Allareddy Sudarsanamma [1972] 83 ITR 759 (AP). In that case, three assessees were partners in a firm, having one-third share each. They individually withdrew substantial amounts from the firm for personal expenses. They had to pay interest to the firm in respect of their drawings. The question was whether the partners are entitled to ded ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er firm having agricultural income not liable to income-tax. The interest paid by the partner to the firm was claimed as deduction under section 36(1)(iii) of the Act. The High Court of Madras held (p. 310) : "Section 67 deals with the method of computing a partner's share in the income of the firm. Sub-clause (3) thereof provides for the deduction of interest paid on capital borrowed for the purpose of investment in the firm. As a specific provision has been made under section 67(3) with reference to the claim for deduction of interest from the share of income, it would follow that section 36(1)(iii), which is in the nature of a general provision relating to all businesses, would have no application. Section 67(3) provides for the deduction of any interest paid by the partner on capital borrowed by him for the purpose of investment in the firm. It proceeds on the basis that in computing the income chargeable on the profits and gains of business or profession, which the share income would come under, interest paid could be deducted from the share. There must be some share income in order to justify the assessee's claim for deduction under section 67(3). When there is none, it is n ..... X X X X Extracts X X X X X X X X Extracts X X X X
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