JUDGMENT
Y.V. Anjaneyulu, J.
1. At the instance of the assessee, the Income-tax Appellate Tribunal made this reference under section 256(1) of the Income-tax Act, 1961 (hereinafter referred to as “the Act”). The question referred relates to the income-tax assessment year 1977-78 and is extracted below :
“Whether, on the facts and in the circumstances of the case, the disallowance of interest of Rs. 16,834 is correct in law either under section 67(3) or under section 36(1)(iii) of the Income-tax Act, 1961 ?”
2. The assessee and his three minor sons constituted a Hindu joint family. The family held the shares in two partnership firms known as “Rami Reddy & Co.” and “Sri Laxmi Prasanna Sugar Factory”. On behalf of the family, the karta held the shares in the partnership firms in a representative character. The total investment of the joint family in the two partnership concerns was Rs. 2,25,558 as on August 31, 1974. There was a partition of the joint family assets on August 31, 1974, between the assessee and his three minor sons. The partnership interest in the two firms was divided among the karta and his three minor sons in equal shares in the course of such partition. It is not clear but it does appear that in the books of the joint family, entries were recorded in support of the division of the partnership interest as on August 31, 1974. It would, however, appear that corresponding entries were not made in the books of the partnership firms with the result that so far as the partnership firms were concerned, the investment still stood in the name of the karta of the family without a formal division among the karta and his three minor sons. It is stated that the division was not made in the partnership books on account of certain practical difficulties. It is claimed that there was an understanding between the karta of the family and his three minor sons that the capital which fell to the share of the three minor sons in the course of the partition on August 31. 1974, should be allowed to stand in the name of the karta in the books of the two partnership firms. In consideration of the above understanding, it appears, the karta agreed to pay to the three minor sons the share of the income corresponding to their 1/4th share and also interest. There is nothing on record to show how the understanding was arrived at between the karta and his three minor sons. The Revenue, however, did not dispute that such an understanding existed. In connection with the income-tax assessment year 1976-77, the assessee claimed deduction of Rs. 17,635 by way of interest payable to the three minor sons in respect of the share of the capital belonging to them which stood invested in the partnership firms. While completing the assessment, the Income-tax Officer restricted the deduction of interest from out of the assessee’s share income to the extent of only Rs. 7,602 on the ground that the assessee had received only that amount of interest from the two partnership firms. The claim for deduction of the balance amount was rejected. It appears that the assessee did not appeal against the disallowance of the balance amount.
3. For the assessment year 1977-78 which is under consideration, the previous year ended on August 31, 1976. The assessee claimed deduction of Rs. 16,834 as interest payable to his three minor sons. The Income-tax Officer declined to allow any portion of the claim on the ground that the assessee did not receive any interest at all from the two partnership firms and, therefore, there was no question of allowing the deduction in the hands of the assessee either under section 67(3) or under section 36(1)(iii) of the Act.
4. Against the disallowance by the Income-tax Officer of the claim for deduction of interest of Rs. 16,834, the assessee filed an appeal before the Appellate Assistant Commissioner who upheld the order of the Income-tax Officer. Thereupon, a second appeal was filed by the assessee before the Income-tax Appellate Tribunal which confirmed the order of the authorities below. It was, in these circumstances, that the petitioner applied for a reference under section 256(1) of the Act and the Tribunal referred the question of law which we have already indicated for the consideration of this court.
5. We have heard Sri S. Dasaratharama Reddy, learned counsel for the assessee, and also learned standing counsel for the Income-tax Department, Sri M. S. N. Murthy. It seems to us that the claim of the assessee for deduction is clearly inadmissible under section 67(3) or alternatively under section 36(1)(iii) of the Act. Section 67 of the Act provides for the method of computing a partner’s share in the income of the firm. Sub-section (3) of section 67 of the Act provides that any interest paid by a partner on capital borrowed by him for the purposes of investment in the firm shall, in computing his income chargeable under the head “Profits and gains of business or profession” in respect of his share in the income of the firm, be deducted from the share. In order that an assessee is entitled to claim deduction under this provision, it is necessary to show that capital was borrowed by the assessee for the purposes of investment in the firm. Unless this condition is satisfied, the claim for interest is not allowable. In the present case, the finding recorded by the Tribunal is that the capital which was invested earlier in the two firms was withdrawn by the assessee for being utilised-in his personal capacity. We may refer to the following finding of the Appellate Assistant Commissioner affirmed by the Tribunal in its order :
“It is also noticed that the partnership concerns were paying interest till the earlier year and this is absent for the current year. Obviously the amounts have been withdrawn from the partnership concerns by the karta for being utilised in his personal capacity.”
6. The correctness of the aforesaid finding is not challenged by the assessee. If it is, therefore, true to say that no capital stood invested in the partnership firm during the previous year relevant to the assessment year 1977-78, the question of allowing any interest upon capital allegedly borrowed for investment in the partnership firm does not arise The claim for deduction under section 67(3) of the Act should, therefore, fail
7. The assessee’s alternative claim for deduction under section 36(1)(iii) of the Act is equally untenable. According to section 36(1)(iii) of the Act, the amount of interest paid in respect of capital borrowed for the purposes of the business or profession is allowable as a deduction. The petitioner’s claim is that the share of capital in the two partnership firms payable to each one of the three minor sons according to the partition arrangement remained unpaid and it must, therefore, be presumed that that capital was borrowed for the purpose of the business or profession. In the first place, the provision for deduction under section 36(1)(iii) of the Act relates to the business carried on by the assessee. The claim for deduction in the present case is made out of the assessee’s share income and not from any other business income of the assessee. Indeed, the assessment order for the year 1977-78 does not show that the assessee has any income from his own business (with the exception of a paltry interest of Rs. 423 from money-lending). A claim was also made for the deduction of interest from out of the share income. In that event, the correct provision that is applicable is section 67(3) of the Act which specifically provides for the deduction of interest from out of the share income in respect of the capital borrowed for investment in the partnership firms. It is not the assessee’s case that the amount owing to the three minor sons was invested in any business carried on on his own account by the assessee so that the interest payable thereon to the three minor sons could be allowed by way of deduction under section 36(1)(iii) of the Act. It is not also shown as to how the sum payable to the three minor sons was utilised for the purpose of the assessee’s business so that interest could by allowed under section 36(1)(iii) of the Act. In the absence of any details supporting the Claim, the authorities below were quite justified in considering the assessee’s alternative claim under section 36(1)(iii) of the Act as equally untenable.
8. In any view of the matter, we are satisfied that the decision of the Tribunal affirming the disallowance of the interest of Rs. 16,834 is correct. We accordingly answer the question in the affirmative, i.e., in favour of the Revenue and against the assessee. No costs.