Law: Income Tax Act, 1961

Section: 36,36(1)(iii)

Income-tax----Deduction---Interest on borrowed capital---Conditions for allowance--¬Once conditions satisfied deduction to be given---Firm---Tribunal finding that part of borrowings diverted by firm to non-business purposes---Not a finding of fact but only an inference in law---Tribunal not justified in holding that assessee not entitled to claim interest on those borrowings--¬Indian Income Tax Act, 1961, S.36(1)(iii). Conditions for getting deduction under section 36(1)(iii) of the Income Tax Act, 1961, in respect of interest are: (i) money must have been borrowed by the assessee; (ii) it must have been borrowed for the purpose of business; and (iii) the assessee must have paid interest on the said amount and claimed it as a deduction. The assessee was a partnership firm which ran a cinema theatre and also a restaurant. The assessee claimed deduction under section 36(I)(iii) of the Income Tax Act, 1961, of a sum of Rs.26,108 being interest paid on capital borrowed for purposes of business. The Income-tax Officer disallowed deduction to the extent of Rs.23,166 on the ground that the partners accounts showed debit balances and no interest was charged on those debit balances. The assessee-firm explained before the Income-tax Officer that originally a loan was taken in order to purchase machinery, etc., and that there were debit balances because of depreciation allowed in earlier years on the fixed assets and that according to the terms of the agreement amongst partners, no interest was to be charged on those debit balances. The Income-tax Officer rejected the contention of the assessee on the grounds that: (i) the fixed assets get depreciated and they were rightly reduced to ,the extent the depreciation was allowed, (ii) the assessee should have returned loans to the creditors instead of permitting the partners to draw excess money in their accounts, and (iii) that since the assessee had been paying interest at 12 per cent. on borrowed money, he calculated 12 per cent. interest on the average debit balances in the capital accounts and arrived at Rs.23,166 as interest, which could not be deducted from the net income. The Appellate Assistant Commissioner found that…

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