Law: Income Tax Act, 1961

Section: 256

Income tax-----Firm Business expenditure Interest Partner withdrawing capital from firm and gifting it Donee depositing amount in firm Partnership not prohibiting withdrawal of capital Finding that there had been withdrawal by other partners Gift being valid interest paid to donee was deductible. M was a partner of a firm. He withdrew a sum of Rs. 50,000 from his capital account in the firm and gifted it to A. A deposited the amount in the firm. The Income tax Officer disallowed deduction of interest paid to A. The appellate authority found that there had been withdrawals from the capital accounts of the other partners and hence held that the gift was valid and the interest paid was deductible and this was confirmed by the Tribunal. On a reference: Held, that there was no prohibition in the partnership deed preventing the partners from withdrawing amounts standing to their credit in the capital account. There was also a finding that there had been withdrawals by other partners. It could be taken as an implied agreement allowing withdrawals. The gift of capital was valid and the interest paid to the donee was an allowable deduction. JUDGMENT A. RAGHUVIR, C.J. The following question has been referred to this Court under subsection (1) of section 256 of the Income tax Act, 1961. The question reads as under: "Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that Sri Mohanlal Choudhuri, one of the partners of the assessee firm, Mahatta Construction Co., Tezpur, was entitled to withdraw Rs. 50,000 from the capital account and to make gift of the same to Miss Anju Mahatta and that the gift was a valid one and the interest payment of Rs. 3,375 and Rs. 4,711 relating to this gifted amount for the assessment years 1970 71 and 1971 72, respectively, was an allowable deduction in the case of the assessee firm?" The firm, Mahatta Construction Co., at Ketekibari at Tezpur, is the assessee in this case. The question relates to the assessment years 1970 71 and 1972. Mohanlal Choudhury, a partner of. the firm, had a credit balance of Rs. 36,619.82. In the relevant year, the profit to his credit was Rs. 36,619.12. Out of the total…

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