The Tax Publishers2021 TaxPub(DT) 0574 (Bang-Trib)

INCOME TAX ACT, 1961

Sections 37(1) & 70

Where the assessee was doing business in individual capacity and was also a partner in a firm then interest on capital borrowed to invest in the firm will give rise to loss from a business source because there was no income for taxing in view of losses incurred by firm, i.e., partnership which can be adjusted against income from another business source, i.e., proprietorship business.

Loss - Set off - Interest on capital borrowed towards investment in firm - No interest income accrued from firm

The assessee was a partner in a firm. The assessee has made substantial investments in the partnership firm. There was no dispute between the AO and the assessee that borrowed funds were invested for the purpose of the partnership business as capital contribution. The assessee claimed deduction of interest on funds borrowed for the purpose of investment as capital in the business of the partnership firm. The partnership firm incurred heavy losses from its business and was not in a position to pay any interest on capital for the investment. Due to the poor financial condition of the partnership firm, the partners of the firm mutually decided to delay the withdrawal of interest on capital from the partnership and withdraw the same only when the partnership firm starts making profits. Though the partners were entitled to interest on capital @12% p.a. from the partnership firm as per the agreed partnership deed, the partners on mutual consent postponed this withdrawal of funds keeping in mind the financial losses being made by the partnership firm. The partner claimed the deduction which it was entitled under section 36(1)(iii) and 37 with income earned from other sources of income under the same head i.e. Vehicle hire, Commission Income and Consultancy income. This resulted in a loss arising from one source under the head business which was set-off with another source of income under the head of PGBP in terms of section 70. Held : Absence of earning any interest income on capital from the firm is no bar to claim the interest paid on borrowings for the purpose of contributing capital to the firm by the assessee as deductible expenditure. In such an event there would be loss under the head 'PGBP' subhead 'interest, salary from the partnership firm' and the assessee is entitled to set off the said loss against other income under the same head 'PGBP'.

Applied:CIT v. Ramniklal Kothari (1969) 74 ITR 57 (SC) : 1969 TaxPub(DT) 0354 (SC).

REFERRED :

FAVOUR : In assessee's favour.

A.Y. : 2016-17



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