Law:

Section:

Section 36(1)(iii) of the Income-tax Act, 1961 [Corresponding to section 10(2)(xiii) of the Indian Income-tax Act, 1922] - Interest on borrowed capital - Assessment years 1960-61 and 1961-62 - Assessee was conducting a tin factory for manufacture of tin containers - Later he formed a firm along with his wife and minor children for setting up a tin printing factory - He took certain loan for firm - Interest paid on said loan was claimed by assessee as business expenditure - Assessee's claim for interest was disallowed by revenue on ground that borrowing was not for business purpose of assessee - Whether fact that firm was not registered or that it did not make any profit was not proper reason for not allowing interest paid by assessee on borrowed investment in firm - Held, yes - Whether, therefore, Tribunal was not justified in holding that interest paid by assessee for raising loan was not an allowable expenditure in computing income of assessee - Held, yes FACTS The assessee formed a partnership 'VMP' along with his wife and minor children with the object of setting up a tin printing factory. This business had not commenced production. Certain amounts were advanced to the above firm from the assessee's tin factory business. The assessee contended that the partnership business was an extension of his own business; that, as the income of the firm would be deemed as his income under section 16(3) of 1922 Act, the advance made to the firm was an amount spent for his own business, and hence the interest incurred by the assessee for raising loan for the business of the firm was an allowable expenditure. This contention was repelled by the Tribunal as well as the subordinate authorities. HELD There can be no doubt that the assessee in the present case was entitled to deduct the interest paid by him on moneys borrowed and advanced by him for the purpose of the business of the firm, 'VMP'. The firm consisted of only the assessee, his wife and minor children. The firm had not commenced production; and it was neither assessed nor registered under the Act for the relevant assessment years. If the firm made any profits, the same would have been deemed as part of the income…

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