INCOME TAX OFFICER v. ARVIND KUMAR LOHIA
[Citation -1987-LL-0211-4]

Citation 1987-LL-0211-4
Appellant Name INCOME TAX OFFICER
Respondent Name ARVIND KUMAR LOHIA
Court ITAT
Relevant Act Income-tax
Date of Order 11/02/1987
Assessment Year 1981-82
Judgment View Judgment
Keyword Tags profits and gains of business or profession • interest paid on borrowed capital • speculation business • payment of interest • capital investment • capital borrowed • money borrowed • business loss • share income
Bot Summary: The assessee accordingly had no share income from the firm and for the assessment year under consideration the assessee has not shown any income from the firm. Under section 67(3) deduction is allowable in respect of interest paid by a partner on capital borrowed by him for the purpose of investment in the firm provided the partner has income by way of his share of the firm's profit. On page 412 their Lordships observed that it is true that under section 67(3) the assessee was entitled to a deduction of the interest paid on the capital borrowed by him for investment in order to derive the share income from a firm and this can be allowed as deduction against the share income which accrues to him from the firm. With great respect to their Lordships of the Delhi High Court we are of the view that the decision of the Supreme Court in the case of Rajendra Prasad Moody cannot be applied to a case where the assessee claimed deduction on account of interest paid on capital borrowed for the purpose of investment in the firm in which he is a partner even if during the relevant previous year no share income has actually resulted from the firm. Section 67(3) reads as under: Any interest paid by a partner on capital borrowed by him for the purpose of investment in the firm shall, in computing his income chargeable under the head 'profits and gains of business or profession' in respect of his share in the income of the firm, be deducted from the share. The Delhi High Court in the case of Madan Lal Jain has observed on page 412 that under section 67(3) the assessee is entitled to a deduction of interest paid on the capital borrowed by him for investment in order to derive share income from the firm and this can be allowed as deduction against the share income which accrues to him from the firm. If in a particular assessment year there is no income from the firm or the firm has not been assessed for that assessment year, section 67(3) will not be called into play with the result that the deduction in respect of interest paid by a partner on capital borrowed by him for the purpose of investment in the firm cannot be allowed as deduction since there is no share income from which such a deduction is to be allowed.


This appeal filed by department is directed against order dated 25- 4-1985 passed by AAC. 2. only ground raised by department is as follows: "That, on facts and in circumstances of case, learned Appellate Assistant Commissioner erred in directing Income-tax Officer to allow deduction of interest amount of Rs. 29,195 from business income of assessee." 3. Though facts giving rise to this appeal lie in narrow compass, issue involved is of considerable importance. assessee is individual. assessment year involved is 1981-82 for which relevant accounting year ended on 2037 Ram Navami. assessee is partner in firm East India Transport Agency. said firm changed its accounting year from Ram Navami to 30th June as result of which there was no assessment of firm for assessment year 1981-82. assessee accordingly had no share income from firm and for assessment year under consideration assessee has not, therefore, shown any income from firm. However, before ITO, assessee claimed that interest to tune of Rs. 29,195 paid by him on capital borrowed for investment in firm should be allowed to be set off against income from speculation. ITO was of opinion that since there was no income from firm this year, there was no justification for allowance of interest paid by assessee on money borrowed for making capital investment in firm. He accordingly disallowed assessee's claim for deduction of aforesaid amount of interest. During relevant accounting year assessee also had income from his speculation business which is business distinct and separate from business of assessee as partner of aforesaid firm. 4. assessee appealed to AAC before whom it was submitted on behalf of assessee that ITO was wrong in not allowing deduction for loss suffered by assessee by way of payment of interest on capital borrowed for purpose of investment in firm. It was submitted that payment of interest was business loss and, therefore, as per provision of section 70(1) read with section 71(1) of Income-tax Act, 1961 ('the Act'), loss was allowable as deduction from income of that year under any other head. It was further submitted that even though no income was earned form firm in which assessee was partner, yet amount of interest paid by him on borrowed capital was allowable in assessment year under consideration as t h e interest amount was paid during year. AAC noted that borrowings of loan capital and payment of interest amount are not in dispute. AAC was of view that assessee suffered loss by way of payment of interest on borrowed capital during relevant previous year and so as per provision of section 70(1), he is entitled to set off of loss against income of said year. ITO was accordingly directed to allow deduction of interest amount of Rs. 29,195 from business income of assessee for year. Aggrieved, department has come up in second appeal before Tribunal. 5. Shri S. K. Lahiri, learned departmental representative submitted that section 67 of Act lays down method of computing partner's share in income of firm. Under section 67(3) deduction is allowable in respect of interest paid by partner on capital borrowed by him for purpose of investment in firm provided partner has income by way of his share of firm's profit. In case there is no such profit, no deduction is allowable under section 67(3). Shri Lahiri placed reliance in support of his contention on decision of Madras High Court in case of M. S. P. Raja v. CIT [1976] 105 ITR 295. It was further submitted by Shri Lahiri that deduction claimed by assessee on account of interest paid on capital borrowed for purpose of investment in firm must come in process of computation of assessee's share in income of firm and that if it was not so, no deduction can be allowed as claimed by assessee. 6. Shri S. S. Jain, learned authorised representative for assessee, on other hand, has fully supported order of AAC. It was submitted that in view of undisputed facts of case, it is clear that interest was paid on amount borrowed for purpose of investment in firm and, therefore, expenditure incurred by assessee in making payment of interest on borrowed capital is clearly allowable as deduction in computation of assessee's income of assessment year 1981-82. In support of his of assessee's income of assessment year 1981-82. In support of his contention Shri Jain placed reliance on decision of Delhi High Court in case of CIT v. Madan Lal Jain [1982] 136 ITR 409. 7. We have considered rival contentions as also facts on record. There is no dispute in this case about material facts which have already been stated above. question which required consideration is whether expenditure of Rs. 29,195 incurred by assessee on capital borrowed for purposes of investment in firm in which he is partner is allowable as deduction in computation of his income for assessment year 1981-82. 8. In case of CIT v. Rajendra Prasad Moody [1978] 115 ITR 519 their Lordships of Supreme Court considered question as whether interest on moneys borrowed for investment in shares is allowable expenditure under section 57(iii) of Act, when shares have not yielded any return in shape of dividend during relevant assessment year. determination of this question turned on interpretation of section 57(iii) which lays down that expenditure to be deductible under this provision must be laid out or expended wholly or exclusively for purpose of making or earning such income. Their Lordships expressed view that it is purpose of expenditure that is relevant in determining applicability of section 57(iii) and that purpose must be making or earning of income. Section 57(iii) does not require that this purpose must be fulfilled in order to qualify expenditure for deduction. It does not say that expenditure shall be deductible only if any income is made or earned. It was further held that he plain natural construction of language of section 57(iii) irresistibly leads to conclusion that to bring case within section, it is not necessary that any income should in fact have been earned as result of expenditure. question referred to Hon'ble Supreme Court was accordingly answered in favour of assessee. 9. aforesaid decision of Supreme Court was followed by Delhi High Court in case of Madam Lal Jain (supra). question referred for opinion of their Lordships was whether, on facts and in circumstances of case, Tribunal was justified in allowing deduction of interest of Rs. 21,400 under section 36(1) (iii) read with section 67(3) of Act. In this case also there was not share income from firm in which assessee was partner in accounting year relevant to assessment year 1963-64. assessee claimed deduction on account of interest paid on capital borrowed for purpose of investment in firm in which he is partner. On page 412 their Lordships observed that it is true that under section 67(3) assessee was entitled to deduction of interest paid on capital borrowed by him for investment in order to derive share income from firm and this can be allowed as deduction against share income which accrues to him from firm. While following decision of Supreme Court in case of Rajendra Prasad Moody (supra) their Lordships of Delhi High Court observed that thought that was decision in respect of item assessable under section 56 of Act and claim arose under section 57(iii) it does not make any difference in principle, for Supreme Court itself makes clear that language under section 37(1) of Act is wider still. Following decision of Supreme Court in aforesaid case, their Lordships of Delhi High Court held that interest paid by assessee cannot be disallowed merely because during previous year in question no share income has actually resulted from firm. question was accordingly answered in affirmative and in favour of assessee. 10. With great respect to their Lordships of Delhi High Court we are of view that decision of Supreme Court in case of Rajendra Prasad Moody (supra) cannot be applied to case where assessee claimed deduction on account of interest paid on capital borrowed for purpose of investment in firm in which he is partner even if during relevant previous year no share income has actually resulted from firm. As has already been shown above, ratio of decision in case of Rajendra Prasad Moody (supra) turns on true interpretation of section 57(iii). Their Lordships have clearly mentioned in that case that under section 57(iii) it is purpose of expenditure that is relevant in determining its applicability and that purpose must be making or earning of income. Section 57(iii) does not require that this purpose must be fulfilled in order to qualify expenditure for deduction. It does not say that expenditure shall be deductible only if any income is made or earned. Thus, even if no income is made or earned, expenditure laid out or expended wholly or exclusively for purpose of making or earning income is allowable under section 57(iii). language of section 67(3) is entirely different. Section 67(3) reads as under: "(3) Any interest paid by partner on capital borrowed by him for purpose of investment in firm shall, in computing his income chargeable under head 'profits and gains of business or profession' in respect of his share in income of firm, be deducted from share." 11. Section 67 lays down method of computing partner's share in income of firm. Delhi High Court in case of Madan Lal Jain (supra) has observed on page 412 that under section 67(3) assessee is entitled to deduction of interest paid on capital borrowed by him for investment in order to derive share income from firm and this can be allowed as deduction against share income which accrues to him from firm. This observation supports contention advanced on behalf of firm that deduction under section 67(3) is allowable only when share income has actually accrued or resulted from firm. language of section 67(3) is also clear. It shows that deduction under this provision is to be made from partner's share from firm's profit. If in particular assessment year there is no income from firm or firm has not been assessed for that assessment year, section 67(3) will not be called into play with result that deduction in respect of interest paid by partner on capital borrowed by him for purpose of investment in firm cannot be allowed as deduction since there is no share income from which such deduction is to be allowed. 12. Section 67(3) thus expressly provides for deduction in computing partner's share of firm's profit in respect of interest paid by him on capital borrowed for purpose of investment in firm. In order to justify claim under this section, there must be some share income from firm in which assessee is partner. If claim is negatived on phraseology of section 67(3), assessee cannot fall back on section 36(1) (iii) which is in nature of general provision relating to all businesses. In such situation section 36(1) (iii) will have no application and claim for deduction cannot be allowed under provision of this section. 13. view that we have taken finds full support from decision of Madras High Court in case of M. S. P. Raja (supra). In this case also Madras High Court was concerned with similar question. It was held that section 67(3) proceeded on basis that in computing income chargeable on profits and gains of business or profession, which share income would come under, interest paid could be deducted from share. There must be some share income in order to justify assessee's claim for deduction under section 67(3). When there is none, it is not possible to accept claim for deduction under that provision. It was further held in this case that in case of interest payable by partner for investment in firm, claim has to be considered only under section 67(3) and not under section 36(1) (iii) or any other provision. So, in view of this authority also, assessee's claim for deduction of amount of interest paid on borrowed capital cannot be considered either under section 67(3) or section 36(1) (iii). 14. We also find ample substance in contention advanced on behalf of t h e revenue that expenditure could be allowed as deduction provided it comes into process of computation of assessee's income. In case of CIT v. B. C. Srinivasa Setty [1981] 128 ITR 294 it has been held by their Lordships of Supreme Court that charging section and computation provision together constitute integrated code. When there is case to which computation provisions cannot be applied at all, it is evident that such case was not intended to fall within charging section. This authority to some extent does support view that if expenditure cannot be considered for purpose of computation of assessee's income, question of allowability of such expenditure as deduction will not arise. 15. In instant case, firm in which assessee is partner was not at all assessed for assessment year 1981-82. assessee had not share income from that firm for assessment year under consideration. In view of facts of case, we are clearly of opinion that assessee is not entitled to deduction on account of interest paid by him on capital borrowed for purpose of investment in firm either under section 67(3) or under section 36(1) (iii) In this view of matter, we set aside order of AAC on point and restore that of ITO for reasons given above. point and restore that of ITO for reasons given above. 16. In result, appeal stands allowed. *** INCOME TAX OFFICER v. ARVIND KUMAR LOHIA
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