AJIT KUMAR SENGUPTA, J. - (1.) IN this reference under S. 256(1) of the IT Act, 1961 for the asst. yr. 1981-82 at the instance of the assessee the following question of law has been referred to this Court : "Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the assessee is not entitled to deduction on account of interest paid by him on the capital borrowed for the purpose of investment in the firm in which he is a partner either under S. 67(3) or s. 36(1)(iii) of the IT Act, 1961?"
(2.) THE facts are that the assessee, an individual, is a partner in the firm M/s East India Transport Agency. The said firm changed its accounting year from Ram Navami to 30th June as a result of which there was no assessment of the firm for the asst. yr. 1981- 82. The assessee accordingly had no share income from the said firm and for the assessment year under consideration the assessee has not, therefore, shown any income from the firm. However, before the ITO the assessee claimed that interest to the tune of Rs. 29,195 paid by him on the capital borrowed for investment in the firm should be allowed to be set off against the income from speculation. The ITO was of the opinion that since there was no income of the firm this year there was no justification for allowance of interest paid by the assessee on the money borrowed for making capital investment in the firm. He accordingly disallowed the assessee's claim for deduction of the aforesaid amount of interest. During the relevant accounting year the assessee also had income from his speculation business which is a business distinct and separate from the business of the assessee as a partner of the aforesaid firm. Against the order of the ITO the assessee appealed to the AAC before whom it was submitted on behalf of the assessee that the ITO was wrong in not allowing deduction for the loss suffered by the assessee by way of payment of interest on the capital borrowed for the purpose of investment in the firm. It was submitted that payment of interest was a business loss and therefore, as per provision of S. 70(1) r/w S. 71(1) of the IT Act, 1961 the loss was allowable as a deduction from the income of that year under any other head. It was further submitted that even though no income was earned from the firm in which the assessee was a partner yet the amount of interest paid by him on the borrowed capital was allowable in the assessment year under consideration as the interest amount was paid during the year. The AAC noted that the borrowings of the loan capital and the payment of interest amount are not in dispute. He was of the view that the assessee suffered a loss by way of payment of interest on the borrowed capital during the relevant previous year and so as per provision of S. 70(1) he is entitled to set off of the loss against the income of the said year. The ITO was accordingly directed to allow deduction of the interest amount of Rs. 29,195 from the business income of the assessee for the year.
(3.) AGGRIEVED by the order of the AAC the Department came up in second appeal before the Tribunal. The Tribunal held that in order to justify a claim under S. 67(3) of the IT Act, 1961 there must be some share income from the firm in which the assessee is a partner. If a claim is negatived on the phraseology of S. 67(3) the assessee cannot fall back on S. 36(1)(iii) which is in the nature of a general provision relating to all businesses. In such a situation S. 36(1)(iii) will have no application and the claim for deduction cannot be allowed under the provision of this section. The Tribunal, therefore, set aside the order of the AAC.;