Case Law Details
Alice Arun Thomas Vs ITO (Kerala High Court)
The Kerala High Court dismissed the appeal challenging the order of the Income Tax Appellate Tribunal (ITAT), Cochin Bench, which had denied the assessee’s claim for deduction under Section 36(1)(iii) of the Income Tax Act.
The appellant contended that she had borrowed money from the open market and invested the borrowed funds as capital in a partnership firm of which she was a partner. According to her, the firm paid interest on such capital investment, and the interest received was used to repay the persons from whom she had borrowed the money. She argued that the interest paid on the borrowed capital was eligible for deduction under Section 36(1)(iii) of the Act and that the Tribunal had wrongly held otherwise.
The Revenue opposed the claim, arguing that the amounts received by the appellant from the partnership firm were profits and could not be treated as expenditure in her hands. It was further contended that the claim under Section 36(1)(iii) was misconceived and that the Tribunal had committed no error in rejecting it.
The High Court examined the pleadings, the questions of law framed, and the submissions made by both sides. The Court noted that the Tribunal had also considered the factual circumstances and had found that Section 37(1) of the Act stood against the appellant’s claim for deduction.
The Court held that Section 36(1)(iii) permits deduction only in respect of interest paid on capital borrowed for the purpose of the assessee’s own business or profession. The appellant had admitted that the borrowed money was invested as capital in the partnership firm. The Court observed that she had not even contended that she was carrying on any business of her own or that the borrowing was for the purpose of such business. Her admitted case was that the borrowed funds were invested as capital in a firm, and it was the firm that carried on the business.
Consequently, the Court accepted the Revenue’s submission that only the firm could have made such a claim, assuming it was otherwise eligible. Finding no error in the Tribunal’s decision, the High Court declined to interfere and dismissed the appeal without answering the questions of law raised.
FULL TEXT OF THE JUDGMENT/ORDER OF KERALA HIGH COURT
This appeal challenges the order of the Income Tax Appellate Tribunal (ITAT), Cochin Bench – a copy of which having been produced and marked on record as Annexure-C.
2 Anil D. Nair, learned senior counsel, instructed by Smt. G. Chitra – appearing for the appellant, argued that the learned Tribunal has erred in not acceding to his client’s claim for exemption under Section 36(1)(iii) of the Income Tax Act (for short ‘the Act’) because, she has established, through cogent means, that the amount in question comprises of the interest that she derives on account of an investment. The learned senior counsel argued that the finding of the learned Tribunal, that his client’s claim is hit by Section 37(1) of ‘the Act’ is untenable.
3.. Jose Joseph – learned standing counsel for the respondent, in response, argued that the facts of this case would establish ineluctably that what the appellant receives from the Firm – of which she is a partner, are profits, which cannot be construed as expenditure at the hands of the former; and hence that her claim under Section 36(1)(iii) of ‘the Act’ is misdirected and misconceived. He insisted that the learned Tribunal has acted without error and prayed that this appeal be dismissed.
4. We have examined the pleadings on record, as also the questions of law framed; and have tested them on the touchstone of the submissions made before us at the Bar.
5. Anil D. Nair – learned senior counsel, explained that his client borrows money from the open market and then invests it in the Firm of which she is a partner, treating it as her capital. He pointed out that the Firm, in turn, pays her interest on such investment, so that she can then pay it off to the persons from whom she had borrowed; thus being fully deserving of being construed as eligible for deduction under Section 36(1)(iii) of ‘the Act’. He argued that any interest received by his client in respect of capital borrowed for the purpose of the business or profession, would be eligible for deduction; and therefore, that the learned Tribunal has erred.
6. We notice that the learned Tribunal has assessed the factual situation also, to inter alia hold that the provisions of Section 37(1) of ‘the Act’ would stand against the appellant from claiming any deduction.
7. In our view, the provisions of Section 36(1)(iii) of the Act would disallow any claim of deduction by the appellant because, she admits that after she borrowed money from others, it has been invested in the Firm as her capital. Going by Section 36(1)(iii) of ‘the Act’, it is only that amount which is paid as interest in respect of capital borrowed for the purpose of business or profession, that can be exempted. In this case, the appellant does not have even a whispering contention that she is running any business on her own, or that she has borrowed for the purpose of capital for such. Her conceded case is that she had borrowed, to invest it as her capital in a Firm; and that the latter is running the business. Obviously, therefore, the submissions of Sri. Jose Joseph, that only the Firm could have made any such claim – even if assumed to be eligible – stands on terra firma.
In such circumstances, we see no reason to intervene and conclude that the learned Tribunal has acted without error. Axiomatically, this appeal is dismissed; and consequently, we do not deem it necessary or requisite to answer any of the questions raised.
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