Law:

Section:

Section 67(3) of the Income-tax Act, 1961 - Firm - Computation of partner's share in income of - Assessee and his three minor sons constituted HUF - Assessee, as karta of HUF, was partner in two firms - There was a partition in HUF but shares in said two firms remained in name of assessee with an understanding that he would pay interest to minor sons on their investment - Whether in view of fact that in accounting year relevant to assessment year in question assessee had withdrawn all amounts from said firms for his personal use, claim for interest to be paid to minor sons could not be allowed to assessee as deduction under section 67(3) - Held, yes Section 36(1)(iii) of the Income-tax Act, 1961 - Interest on capital borrowed - Whether on facts mentioned under aforesaid head 'Firm - Computation of partner's share in income of claim for deduction of said interest could not also be allowed under section 36(1)(iii) as claim for deduction was made out of assessee's share income and not from business income - Held, yes Facts The assessee and his three minor sons constituted a HUF. The family-held shares in two firms through its karta, i.e., the assessee. There was a partition of the joint family assets on 31-9-1974, between the assessee and his three minor sons. The partnership interest in the two firms was divided among the karta and his three minor sons in equal shares in the course of such partition. In the books of joint family, entries were recorded in support of the division of partnership interest as on 31-8-1974. However, corresponding entries were not made in the books of the partnership firms with the result that so far as the partnership firms were concerned, the investment still stood in the name of the karta of the family without formal division among the karta and his three minor sons. It was claimed that there was an understanding between the karta of the family and his three minor sons that the capital which fell to the share of the three minor sons in the course of partition should be allowed to stand in the name of karta in the books of the two partnership firms. In consideration of the above understanding, the karta agreed to pay to the three…

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