Law:

Section:

Section 182, read with section 183, of the Income-tax Act, 1961 - Firm - Position prior to 1-4-1993 - Assessment year 1962-63 - Whether firm and its partners are treated as separate and distinct entities for purpose of assessment - Held, yes - Assessees were partners in a firm - Partnership deed made partners liable to pay interest on withdrawals made by them for personal expenses from funds of firm, although no interest was payable by firm to individual partners on their capital investments - Assessees withdrew substantial amounts individually and during relevant period they had to pay interest thereon which they sought to be deducted from computation of taxable income - Interest paid had been shown in computing profits of firm and they had in fact been assessed to tax in hands of firm as per provisions of section 182 - After ascertainment of taxable profits of firm, allocation of respective shares of three partners had been made - Whether transaction relating to payment of interest by partners to firm on borrowals or withdrawals of amounts belonging to firm was undoubtedly a commercial or business transaction which actually earned profits to firm - Held, yes - Whether doctrine of real income had no application to instant case as there was business transaction which earned profits to firm - Held, yes - Whether, therefore, assessee were not entitled to deduct amounts paid by them to firm from share income allocated to them - Held, yes FACTS For the assessment year 1962-63, the assessee were partners in a firm having one third share each in the profit or loss of the firm, and had capital accounts in the firm's books. The partners individually withdrew substantial amounts from the firm for the purpose of meeting their personal expenses, and, according to the terms of the partnership deed, had to pay interest to the firm therefor, though no interest was payable on their capital investments. The assessee's claim for deduction of the interest amount from their other income was negatived by the ITO. On second appeal, the assessees contended before the Tribunal (a) that payment of interest having been laid out wholly and exclusively for the purpose of carrying on…

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