Allowability of Interest on capital to Partners is subject to satisfaction of requirements of s. 36(1)(iii)

Munjal Sales vs. CIT (Supreme Court)

(i) A firm seeking to claim deduction of interest paid on capital from its partners has to first satisfy the requirements of s. 36(1)(iii) and thereafter the limits imposed by s. 40(b)(iv). The fact that the said capital is not “loans” or “advances” is irrelevant.

(ii) Where loans given in an earlier year were accepted as having been given for business purposes, the interest thereon could not be disallowed in a subsequent year.

(iii) Where the assessee had sufficient profits and own funds, the submission that loans to sister concerns were out of those funds had to be accepted.