Law:

Section:

section 36(1)(iii) of the income-tax act, 1961-interest on borrowed capital-assessee, a co-operative society, was having banking unit b and also consumer stores unit c-account books, which were maintained separately, disclosed that b advanced loans to c on which interest was credited in b's account by debit to c's account-whether interest so debited was admissible deduction in computing total income of assessee-held, on facts, no section 80p(2)(a)( i) of the income-tax act, 1961-deductions-income of co-operative societies-whether in view of facts mentioned under caption "interest on borrowed capital" any interest income could be said to have arisen to assessee for being considered for deduction under section 80p(2)(a)( i)-held, on facts, no Facts The assessee was a co-operative society carrying on both banking business and a consumer store. It had maintained separate accounts for the two units. Its accounts disclosed credits in the banking unit B towards interest on amounts advanced to the consumer stores unit C, by contra debit to the latter. Its claims for deduction of the interest in the computation of the profits of the consumer stores unit and for deduction of interest credited to banking unit under section 80P(2)(a)( i) were disallowed by the ITO in reassessment proceedings. Though the AAC allowed the assessee's claim, the Tribunal restored the order of the ITO in second appeal. On reference : Held 1. Though separate sets of accounts were maintained for the two business activities, the tax was chargeable on the total income of the assessee and not separately on the two activities. Further, the words 'borrowed and paid' in section 55(1 )(iii) clearly postulates two different entities, one which lends capital and the other which borrows and pays interest. The same entity cannot be its own lender and borrower, nor can interest be paid to self. Therefore, the amount of interest claimed as expenditure by the assessee was not allowable because it was paid and received by the same person and not from one person to another. As a logical corollary, when factually there was no expenditure, no income could arise in the other unit in whose accounts the interest was…

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