S. Ranganathan, J.
1. A very short question is involved in this reference under the I.T. Act at the instance of the Commissioner of income-tax. The reference arises out of the assessment of Shri Madan Lal Jain for the assessment year 1963-64. The assessed, an individual, is a partner in two firms, M/s. Kanshi Ram Shital Kumar and M/s. Jain Finance Co. M/s. Kanshi Ram Shital Kumar, adopted the financial year as its previous year and the assessed derived a share income of Rs. 6 from this firm during the financial year 1962-63 relevant for the assessment year 1963-64. He had besides some property income, speculation profits and capital gains.
2. The assessed had become a partner in M/s. Jain Finance Co. under as instrument of partnership dated May 10, 1962. But the accounts of M/s. Jain Finance Co. were closed for the first time in May, 1963, and the previous year of that firm was the year which ended on the corresponding day in May of each year. The result was that in respect of the share in come from M/s. Jain Finance Co. the previous year of the assessed ran from May to May and the share income attributed to the period May 10, 1962, to May 9, 1963, became assessable in the assessment year 1964-65 for the first time. There was no share income from that firm which could be assessed in the assessment year 1963-64.
3. However, in order to invest the capital of Rs. 2,00,000 which was obligatory on him under cl.(5) of the instrument of partnership dated May 10, 1962, of M/s. Jain Finance Co. the assessed has to borrow the said sum of Rs. 2,00,000 from M/s. Kanshi Ram Shital Kumar. On this loan he had to pay interest at 12% p.a. Thus, for the period May 10, 1962, to March 31, 1963, he was called upon to pay interest of Rs. 21,400 became due from him to that firm on March 31, 1963. The assessed claimed that this sum of Rs. 21,400 should be deducted in the computation of his assessable income for the assessment year 1963-64.
4. The ITO rejected the assessed's claim on the very simple ground that the interest in question was to be allowed as a deduction only under s. 67(3) of the I.T. Act. 1961, but the since there was no share income from the firm of M/s Jain Finance Co. included in the assessment year 1963-64, the assessed could not claim any deduction in respect of that payment. Such a deduction, the ITO held, could not also be allowed from any other income of the assessed. This view of the ITO was confirmed by the AAC. But the assessed was successful before the Tribunal. The Tribunal held the disallowance of the claim was clearly erroneous. It referred to the decision of the Supreme Court in Eastern Investment Ltd. v. CIT : 20ITR1(SC) and of the Madras High Court in P.V. Mohamed Ghouse v. CIT : 49ITR127(Mad) and to certain decisions of the Bombay High Court and allowed the assessed's claim.
5. The Commissioner is aggrieved and has come up to this court on reference on the following question of la :
'Whether, on the facts and in the circumstances of the case, the Tribunal was justified in allowing the deduction of interest of Rs. 21,400 under section 36(1)(iii) read with section 67(3) of the Income-tax Act ?'
When the reference came up for hearing before us earlier we were of opinion that the difference between the assessed and the department could perhaps be easily sorted out by some administrative action. We though that if the department considered that the interest should be allowed only in the year in which the share income was assessed then there should be no difficulty in the assessed getting a deductions for the interest pertaining to the period May 10, 1962, to May 9, 1963, in the assessment year 1964-65 against the share income from M/s. Jain Finance Co. for that previous year and so on in the future year. If that deduction is allowed the assessed would have no grievance because virtually in one year or another he would get the deduction in respect of all the interest paid on the capital borrowed for the above purposes. But Shri Monga had pointed out on behalf of the assessed that consistent with the assessed's claim in the assessment year 1963-64 he had claimed in subsequent year also only the interest pertaining to the corresponding financial year on the basis of which payment had been made to M/s. Kanshi Ram Shital Kumar. In other words, the deduction had been allowed to the assessed in all the assessment year but no relief had been given only for the interest in respect of the period from May 10, 1962, to March 31, 1963, on the score of the above technical objections. We thought that the assessed was entitled in equity to the relief claimed by him and adjourned the matter to enable the learned counsel for the assessed to make necessary representations or file a revision application before the Commissioner of Income-tax or before the Central Board of Direct Taxes and obtain the necessary relief. But after several adjournments we understand that the assessed's efforts in this direction have not been successful and that the CBDT considered itself unable to interfere perhaps due to the pendency of this reference. In the above circumstances, we have heard this reference and proceed to dispose of the same.
6. It is true that under s. 67(3) of the Act the assessed is entitled to a deduction of the interest paid on the capital borrowed by him for investment in order to derive share income from a firm and this can he allowed as a deduction against the share income which accrues to him from the firm. But we agree with the Tribunal that the further qualification insisted upon by the ITO that unless there is in the corresponding previous year an actual receipt of income by way of share income from the firm the claim cannot be allowed. As the Tribunal had pointed out, it is not correct to say that, in order that a deduction can be allowed, in respect of either interest paid or for any other expenditure incurred for the purposes of a business assessable under s. 28 or in order to earn any other income assessable under s. 36 there should be a corresponding receipt against which the expenditure could be allowed. Where an assessed has incurred expenses in order to acquire a source of income but there is no income from that particular source then the income should be taken as nil and the assessed should be given such deduction as would be allowable to him had there been a positive income. It is true that some decisions had taken the view that interest on borrowed monies for the purpose of investment could not be allowed as a deduction unless and until there was any benefit by way of return controversy on this aspect of the matter as the principle had been not set at rest by the Supreme Court in CIT v. Rajendra Prasad Mody : 115ITR519(SC) . The Supreme Court was concerned in that case with the case of interest paid on monies borrowed for purposes of making an investment in certain shares. The shares had yielded no dividends during the accounting year in questions and the questions was whether notwithstanding the absence of any dividend income assessable in the particular assessment year the assessed was entitled to get a deduction in respect of interest on the monies borrowed for the purposes of making the above investment. This question was answered by the Supreme Court in the affirmative. Though that was a decision in respect of an item assessable under s. 56 and the claim arose under s. 57(iii) it does not make any difference in principle, for, the Supreme Court itself makes it clear that the language of s. 37(1) is wider still.
7. In view of the above decision of the Supreme Court it is clear that the interest paid by the assessed cannot be disallowed merely because during the previous year in question no share income has actually resulted from the firm. In the present case the difficulty arises because of a difference between the previous year according to which interest is paid and the previous year of the firm which yields the share income. But there could also be other cases where an assessed may borrow monies for investing as capital in a partnership. But for several reasons it may take some time before the partnership is actually able to earn income from its business and before a share income materialises to the assessed. In the light of the ruling of the Supreme Court referred to earlier it is difficult to say that in such a case the assessed will not be entitled to any deduction at all until and unless there is a positive share income from the firm.
8. For the above reasons, we are of opinion that the view taken by the Tribunal in the present case was correct. We, thereforee, answer the question referred to us in the affirmative and in favor of the assessed. We make no order as to costs.