GULATI, J. - (1.) IN compliance with the direction of this court under Section 66(2) of the Indian Income -tax Act, 1922 (hereinafter referred to as 'the Act'), the Income -tax Appellate Tribunal, Allahabad, has referred the following question for the opinion of this court: 'Whether, on the facts and in the circumstances of the case, the assessee was entitled to the deduction of interest and litigation expenses from the share of the profit derived by him from Niranjan Lal Bhargava and Co.?'
(2.) THE assessment year involved is 1956 -57, of which the previous year is the calendar year ending on December 31, 1955. During the relevant previous year the assessee derived income under various heads including 6/16ths share in a registered firm of the name and style of M/s. Niranjan Lal Bhargava and Company. He claimed as deduction out of his total income a sum of Rs. 16,588 representing interest on loans from the Allahabad Bank and a Life Insurance Company and costs of litigation with the Allahabad Bank. The assessee had claimed this deduction as a loss in the money -lending business. This claim was turned down by the Income -tax Officer as well as by the Appellate Assistant Commissioner of Income -tax, on the ground that in the previous year the assessee did not carry on any money -lending business nor had the loans been raised in connection with the assessee's business. Before the Income -tax Appellate Tribunal the assessee based his claim under Section 10(2)(xv) of the Act as expenditure incurred wholly and exclusively for the purpose of the business. The Tribunal has accepted this claim and has held that the assessee was entitled to claim interest and litigation expenses as expenses deductible out of his share income from the firm of M/s. Niranjan Lal Bhargava and Company. However, as the exact amount of interest relating to the relevant previous year was not ascertainable, the Tribunal set aside the assessment order and remanded the case to the Income -tax Officer to ascertain the amount of interest relating to the previous year and to allow the same as deduction along with the business expenses. The Commissioner of Income -tax is aggrieved and hence this reference at his instance.
(3.) IN the year 1949, the assessee had taken a loan of Rs. 2 lakhs from the Allahabad Bank and another loan of Rs. 25,000 from the Bombay Life Insurance Company. The assessee did not repay the loan in full in accordance with the terms of the agreement and the Allahabad Bank filed a suit on November 15, 1952, for the recovery of the balance with interest. The suit was decreed with costs on April 12, 1955, by the civil judge, Allahabad. The decree included a sum of Rs. 15,270 on account of interest and costs. This figure together with the interest payable to the Bombay Life Insurance Company came to Rs. 16,755. Deducting a sum of Rs. 188 on account of interest received by the assessee, the net interest and costs payable worked out to Rs. 16,588.;