Law:

Section:

Section 37(1) of the Income-tax Act, 1961 - Business expenditure - Allowability of - Assessment year 1973-74 - Assessee and his brother, being partners in a firm, had transferred certain amount to their widowed mother and their unmarried sisters - Amount remained with firm - On retirement of asseessee's brother, business was run by assessee as proprietor and amount remained deposited in business - Assessee's claim for interest on said amount as business expenditure was disallowed by ITO as well as by Tribunal - Whether assessee held money for benefit of his mother and unmarried sisters in a fiduciary capacity and a constructive trust arose in their favour, therefore, he had benefit of that amount and right of user thereof in his business - Held, yes - Whether since this important aspect of matter had been overlooked, matter was to be remanded to Tribunal for being considered afresh - Held, yes FACTS The assessee had been carrying on business in partnership with his brother. While in partnership, they transferred certain amount to their widowed mother and their unmarried sisters. The said amount was, however, retained with the partnership. On 21-5-1971, firm was dissolved on retirement of the brother of the assessee, from the firm, and the business of the firm was taken over by the assessee as the sole proprietor. The sum transferred in favour of the mother and unmarried sisters was remained deposited in the business. For the relevant assessment year the assessee claimed deduction for interest on amount standing to the credit of assessee's mother and sisters in the computation of his taxable income. The claim was disallowed by the ITO. The AAC confirmed the disallowance. The Tribunal also upheld the disallowance on the ground that the assessee could not produce evidence to show that the money really was required for business purposes or that there was any agreement to pay such interest. On Reference : HELD It was clear that the assessee held the money for the benefit of his widowed mother and unmarried sisters in a fiduciary capacity and a constructive trust arose in favour of the latter under the relevant provisions of the Indian Trusts Act, 1882. The assessee…

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