Law:

Section:

Section 36(1)(iii), read with section 67(3), of the Income-tax Act, 1961-Interest on borrowed capital-Assessee-partner borrowed moneys for investing as capital in partnership-Whether interest paid by assessee on borrowed moneys allowable as a deduction even though in relevant assessment year no share income resulted to assessee from said partnership-Held, on facts, yes Facts The assessee, who was partner in two firms K and J, had borrowed moneys for the purposes of investing as capital in firm J. The assessee followed the financial year as the previous year while firm J maintained its accounts from May to May. During the accounting year relevant for the assessment year 1963-64, the assessee paid a sum of Rs. 21,400 by way of interest on the amount borrowed for investment in firm J and claimed the same as a deduction. The ITO, however, disallowed the claim, holding that the amount of interest was allowable only under section 67(3), but as there was no share income from firm J in the assessment year 1963-64 (the previous year of firm J being from 10-5-1962 to 9-5-1963 which was different from the assessee's previous year being the financial year), the assessee could not claim any deduction in respect of the interest paid. He further held that such a deduction could not also be allowed from any other income of the assessee. On appeal, the A AC upheld the ITO's order. On second appeal, the Tribunal pointed out that in order to allow deduction in respect of either interest paid or for any other expenditure, it was not necessary that there should be a corresponding receipt against which the expenditure could be allowed. It, accordingly, held that the amount of interest was allowable as a deduction under section 36(1)(iii), read with section 67(3). On reference : Held Where an assessee has incurred expenses in order to acquire a source of income but there is no income from that particular source then the income should be taken as nil and the assessee should be given such deductions as would le allowable to him had there been a positive income. Having regard to the facts and circumstances of the case, the interest paid by the assessee could not be disallowed merely…

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