Law:

Section:

Section 37(1) of the Income-tax act, 1961 Business, expenditure Assessee-partner became firm's debtor by withdrawals for personal expenses and paying income-tax and obtained loan from his brother, who had a credit balance with firm, to discharge this debt He claimed deduction for interest paid Whether deduction allowed by tribunal legally correct Held, on facts, no. Facts The assessee was a partner in a firm P and also carried on his personal business as sole proprietary concern Q. On 1-04-1966, his account in the firm showed a debit balance of Rs. 1,16,852 as on 1-04-1966, whereas his brother's sole proprietary concern R (which also had an account with the firm P) showed a credit balance. The assessee arranged a loan from his brother on interest by getting Rs. 1,13,500 transferred from R's account to his own account in the firm's books and paid interest of Rs. 17,537, Rs. 15,724, Rs. 18,091 and Rs. 13,337 for the assessment years 1967-68, 1968-69, 1969-70 and 1970-71. The ITO disallowed deduction of this interest, holding that the assessee had raised the said loan not for business purposes but to repay a personal debt representing withdrawals from his account in the said firm P to meet personal expenses and to pay income-tax. On appeal, the AAC upheld the disallowance, concluding that since the loan had not been taken for investment as capital either in the partnership firm P or in the assessee's personal business Q, the provisions of neither section 67(3) nor section 36(1)(iii ) were attracted. In further appeal before the Tribunal, the assessee pressed his claim under section 37(1). After examining the assessee's financial position in respect of the net wealth held by him, the capital available in his proprietary concern, and his income from the partnership firm P, for the assessment years 1967-68, 1968-69 and 1969-70, the Tribunal concluded that the assessee's capital in his personal business Q was not large enough and that the repayment of his debt out of that capital would have affected his personal business, forcing him to resort to borrowings to keep it going. On this hypothesis, the Tribunal allowed the appeal, holding that the said loan was meant to…

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