Court Upholds ITAT's Decision, Disallows Deduction for Interest on Borrowed Capital Invested in Partnership Firm
In a recent judgment, the Kerala High Court dismissed the appeal filed by Alice Arun Thomas against the Income Tax Officer, affirming the decision of the Income Tax Appellate Tribunal (ITAT), Cochin Bench. The case revolved around the appellant's claim for deduction under Section 36(1)(iii) of the Income Tax Act, 1961, which allows for deduction of interest on borrowed capital used for business or professional purposes.
Alice Arun Thomas, represented by senior counsel Anil D. Nair, argued that the interest paid on money borrowed from the open market to invest as capital in a partnership firm should qualify for deduction under the said section. The appellant contended that the firm, in which she is a partner, paid her interest on this capital, which she then used to repay her borrowings, thereby making her eligible for the deduction.
However, the court, comprising Justices Devan Ramachandran and Basant Balaji, upheld the ITAT's view that such interest does not qualify for deduction under Section 36(1)(iii). The court emphasized that the deduction under this section is applicable only if the interest is paid on capital borrowed for a business or profession carried on by the taxpayer themselves. Since the appellant invested the borrowed amount as capital in a partnership firm, the firm, and not the appellant, carries on the business. Therefore, any claim for deduction could only be made by the firm itself, not by an individual partner.
The court also noted that the provisions of Section 37(1) of the Income Tax Act would preclude the appellant from claiming any such deduction. The court concluded that the Tribunal had acted correctly in its assessment and dismissed the appeal, finding no error in the Tribunal's decision.
The ruling clarifies the applicability of deduction claims under Section 36(1)(iii), reinforcing that individual partners cannot claim such deductions for interest on borrowed capital invested in partnership firms.
Bottom line:-
Deduction under Section 36(1)(iii) of the Income Tax Act is allowable only if the interest is paid in respect of capital borrowed for the purpose of the business or profession carried on by the taxpayer themselves. Investments made as capital in a partnership firm do not qualify for such deduction at the hands of the individual partner.
Statutory provision(s): Section 36(1)(iii) of the Income Tax Act, Section 37(1) of the Income Tax Act
Alice Arun Thomas v. Income Tax Officer, (Kerala)(DB) : Law Finder Doc id # 2913108
