P R M ABDUL RAHMAN AND CO Vs. COMMISSIONER OF INCOME TAX

JUDGEMENT

(1.) THE assessee are a firm registered under the provisions of Section 26-A of the Indian Income-tax Act, 1922. THEre are two partners and the partnership deed is dated 27th February 1936. It appears, however, that the partnership was constituted on the 20th of March 1934. THE senior partner advanced to the firm in his own name and the name of his wife a total sum of Rs. 31,141-0-4 and the junior partner a sum of Rs. 5,973-2-5. THE partnership deed provides that "the net profits of the business after deducting all working expenses and interest paid or payable on capital whether belonging to the partners or depositors or others from whom moneys might have been borrowed shall be divided between the parties hereto in the proportion of :3, either share going to the party of the first part and three shares going to the party of the second part." For the year of assessment, 1936-37, the assessee claimed to be entitled to deduct a total sum of Rs. 8,914 which had been paid as interest to the partners, to the wife of the senior partner and to strangers who had deposited moneys with the firm. THE Income-tax authorities allowed the deductions so far as they represented interest payments to strangers, but refused to allow the deduction of Rs. 2,774 paid to the partners and Rs. 1,680 paid to the wife of the senior partner. THE Income-tax authorities have held that the payment of Rs. 1,680 to the senior partners wife was really a payment to the husband and this finding is not open to question in these proceedings, but it is said that the partners are still entitled to deduct the two sums of Rs. 2,774 and Rs. 1,680 as being payments of interest on moneys lent by them to the firm. Section 10(2)(iii) of the Act allows to be deducted from the profits interest in respect of capital borrowed for the purposes of the business, where the payment of interest thereon is not in any way dependent on the earning of profits. THE assessee contended before the Commissioner that inasmuch as the moneys which they paid represented interest on loans borrowed for the purposes of the business they should be allowed the deductions. This was refused, and the Commissioner of Income-tax has stated the grounds in his statement of the Case.

(2.) IT is not disputed that the moneys which the assessee paid into the firm were used for the purposes of the business. The Commissioner however refused to allow the deduction on two grounds :-