INCOME TAX ACT, 1961

Section 40(b)(iv)

Business deduction under section 40(b)(iv) - Assessee-individual was partner in many firms and claimed deduction of interest paid on debit balance of his capital account with some partnership firms - Assessee failed to show receipt of interest income for amount invested in one of the firms (S) -

Assessee-individual was partner in eight firms and claimed deduction of interest paid on debit balance of his capital account with some partnership firms. AO alleged that assessee did not show receipt of interest income for amount invested in one of the firms (S), and made addition by working out interest on capital balance of assessee with a firms (S) and disallowing interest claimed by assessee to that extent.Held<.b> Since no interest was due to the assessee or received by him from the partnership firms (S) on the capital account as a partner, the same, therefore, could not be brought to tax as the business income of the assessee. It was, however, noticed that such interest on notional basis was not added by AO to the total income of the assessee, but the deduction claimed by the assessee on account of interest paid on the debit balances of capital account with other firms was disallowed by him to the extent of interest attributable to the credit balance of capital accounts with S on allegation that there was diversion of interest bearing capital for making investment in capital of S. Basis adopted by revenue to make addition on account of disallowance of interest was not sustainable. Even if it was assumed for the sake of arguments that the entire capital in the partnership firm of S was invested by the assessee from the capital withdrawn from other partnership firms, the said investment was made by the assessee for the purpose of business, in as much as income received from the partnership firm of S in the form of profit, remuneration or interest was chargeable to tax in his hands under the head 'Profits and gains of business or profession'. Withdrawals made by assessee from the other partnership firms on which interest was paid by him, thus, were not utilized for non-business purpose and interest paid thereon, could not be disallowed on the ground that there was utilization of corresponding funds for non-business purpose as alleged by revenue.