1. In compliance with the direction of this court under Section 66(2) of the Indian Income-tax Act, 1922 (hereinafter referred to as 'the Act'), the Income-tax Appellate Tribunal, Allahabad, has referred the following question for the opinion of this court:
'Whether, on the facts and in the circumstances of the case, the assessee was entitled to the deduction of interest and litigation expenses from the share of the profit derived by him from Niranjan Lal Bhargava & Co.?'
2. The assessment year involved is 1956-57, of which the previous year is the calendar year ending on December 31, 1955. During the relevant previous year the assessee derived income under various heads including 6/16ths share in a registered firm of the name and style of M/s. Niranjan Lal Bhargava and Company. He claimed as deduction out of his total income a sum of Rs. 16,588 representing interest on loans from the Allahabad Bank and a Life Insurance Company and costs of litigation with the Allahabad Bank. The assessee had claimed this deduction as a loss in the money-lending business. This claim was turned down by the Income-tax Officer as well as by the Appellate Assistant Commissioner of Income-tax, on the ground that in the previous year the assessee did not carry on any money-lending business nor had the loans been raised in connection with the assessee's business.
3. Before the Income-tax Appellate Tribunal the assessee based his claim under Section 10(2)(xv) of the Act as expenditure incurred wholly and exclusively for the purpose of the business. The Tribunal has accepted this claim and has held that the assessee was entitled to claim interest and litigation expenses as expenses deductible out of his share income from the firm of M/s. Niranjan Lal Bhargava and Company. However, as the exact amount of interest relating to the relevant previous year was not ascertainable, the Tribunal set aside the assessment order and remanded the case to the Income-tax Officer to ascertain the amount of interest relating to the previous year and to allow the same as deduction along with the business expenses. The Commissioner of Income-tax is aggrieved and hence this reference at his instance.
4. In the year 1949, the assessee had taken a loan of Rs. 2 lakhs from the Allahabad Bank and another loan of Rs. 25,000 from the Bombay Life Insurance Company. The assessee did not repay the loan in full in accordance with the terms of the agreement and the Allahabad Bank filed a suit on November 15, 1952, for the recovery of the balance with interest. The suit was decreed with costs on April 12, 1955, by the civil judge, Allahabad. The decree included a sum of Rs. 15,270 on account of interest and costs. This figure together with the interest payable to the Bombay Life Insurance Company came to Rs. 16,755. Deducting a sum of Rs. 188 on account of interest received by the assessee, the net interest and costs payable worked out to Rs. 16,588.
5. The assessee, late Sri Niranjan Lal Bhargava, was running three cinema houses at Allahabad, known as Bishambhar Palace, Moti Mahal and Rupbani. Previously the assessee used to be assessed in respect of business from these cinemas in the status of an individual. In the previous year, relevant to the assessment year 1956-57, the cinema business was taken over by a partnership-firm of the name and style of Niranjan Lal Bhargava and Company in which the assessee had 6/16ths share. The Tribunal has found that the two loans were invested by the assessee in the cinema business, having been utilised mainly for giving advances to the film distributors who supplied films to the assessee's cinemas. It is thus clear that the loans had been raised by the assessee for the purposes of his business and interest payable on such loans would clearly be an allowable expenditure under Section 10(2)(xv) of the Act.
6. The learned counsel for the department does not dispute this position. He, however, argues that the position changed when the cinema business was taken over by a partnership firm. We fail to understand how this fact would change the legal position. The mere fact that the assessee took a few more persons as partners with him in running the business does not mean that he ceased to carry on business. It cannot be disputed that the share income of a person from a partnership firm carrying on business is income from business and every expenditure allowable under Section 10(2) of the Act in the computation of the business income is permissible to such a person. It is argued by the learned counsel for the department that while the business is transferred to a partnership-firm, the loans were retained by the assessee himself and, as such, he was not entitled to any deduction on account of interest, etc. To us the argument appears to be wholly without force. If the assessee had transferred to the partnership firm the liability on account of two loans, the firm would have been entitled to claim deduction in respect of these loans but since the assessee did not do so and retained the liability he alone was entitled to claim the deduction. In the instant case, the assessee claimed deduction against his share income and not against the profits of the firm as a whole. We are, therefore, of the opinion that the view taken by the Tribunal is perfectly correct.
7. We, accordingly, answer the question in the affirmative, in favour of the assessee and against the department. The assessee is entitled to costs, which we assess at Rs. 200.