Law:

Section:

Section 37(1) of the Income-tax Act, 1961 - Business expenditure - Allowability of - Seven persons entered into an agreement with one H, owner of a theatre, under which H agreed to convey a theatre to them on payment of certain consideration - Half of consideration was paid immediately and balance was agreed to be paid in instalments - On same day said seven persons constituted a firm to run said theatre and assesses was one of these persons - In previous year, relevant to assessment year in question, certain amount was paid by assessee to H by way of interest on balance amount - Whether in view of fact that when agreement was concluded between H and seven individuals partnership firm was not in existence, said individual persons and not firm was liable towards M and thus said interest paid to H by assessee was to be allowed as deduction under section 37(1) to assessee in his individual assessment - Held, yes Facts One H was the owner of a theatre. An agreement was entered into between the seven persons and said H under which H had agreed for the conveyance of the theatre against the payment of certain consi-deration. Half of the consideration was paid immediately and balance was agreed to be paid in instalments. On the same day, a partnership deed was executed amongst the said seven purchasers to run the said theatre and the assessee was one of them. In the previous year relevant to the assessment year in question the assessee paid certain amount to H by way of interest on balance instalment amounts and claimed deduction thereof from her individual assessment. The ITO allowed it. However, the Commissioner, exercising his powers under section 263, held that the firm was intended to be the owner of the property and not the partners individually and since the privity of contract was between the owner H and the firm represented by all the partners, it was not possible to treat the amount due to H by the firm as capital borrowed by the assessee for investing the same in the firm, and thus, the said interest could not be allowed as deduction in the individual assessment of the assessee. On appeal, the Tribunal also upheld the Commissioner's order. On reference: Held…

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