1. This reference relates to the propriety of disallowance of an expenditure incurred in the form of interest paid on borrowing. The assessment year is 1961-62. The assessee during that year carried on money-lending business and in addition received income from the firms of partnership. He was a partner in Mappadam Rubber Estate, an agricultural estate in which he had invested Rs. 1,00,000 towards his share capital. Likewise, he had also invested in Nathan Muthu Thalanar Estate, a forest taken for clearing and cultivation of paddy, etc., a sum of Rs. 2,25,000 towards his half share of the capital in a firm of partners of which the assessee was one. He returned an income of Rs, 7,661 from his moneylending business; but this was arrived at after deducting a sum of Rs. 20,700 by way of interest paid on borrowed money. The Income-tax Officer disallowed a sum of Rs. 5,321 as referable to a sum of Rs. 2,16,742 which constituted the assessee's share of the capital in Nathan Muthu Thalanar Estate. This was on the ground that this expenditure by way of interest was not wholly and exclusively laid out for the sake of the assessee's business. He reasoned that, as there was no income from this particular investment in the firm which could be considered for the purpose of income-tax assessment, the proportionate interest on account of funds borrowed and invested in that manner would be disallowed. The Appellate Assistant Commissioner concurred with that view. But he put the reason in a slightly different manner, namely, that the amount was invested in an asset which did not yield any income which could be taxed under the Income-tax Act. Apparently, what he had in mind was that the share of income as and when due to the assessee from the firm was agricultural in character. Whatever that be, that approach is no longer maintained before us. When the matter was taken up in further appeal by the assessee, the Tribunal declined to interfere. It observed that the money to the extent of Rs. 2,25,000 had not been borrowed for the purpose of the assessee's business and it constituted a withdrawal from the business funds of the assessee's personal account. The Tribunal added that the investment in the firm had not resulted in the creation of any asset that could be put to the assessee's business of money-lending. At the instance of the assessee the following question has been referred to us under Section 256(1) of the Income-tax Act, 1961 :
'Whether, on the facts and in the circumstances of the case, the assessee is entitled to the allowance of Rs. 5,321 under Section 10(2)(iii) of the Income-tax Act, 1922 ?'
2. The contention of the assessee before us is two-fold: (1) that the expenditure by way of payment of interest on money borrowed and invested in the firm is expenditure allowable as deduction under Section 10(2)(iii), and (2) that, as a matter of fact, the sum of Rs. 2,25,000 invested as share capital in the firm was not from borrowed money but out of the assessee's other funds in his money-lending business.
3. On the first point, the argument is that, just as loss arising out of one of the businesses of the assessee could be set off against the profits and gains arising from other business of his, expenditure incurred in connection with a particular business of the assessee could be allowed as deduction from income arising from the other business. In support of this proposition, reliance is placed on Commissioner of Income-tax v. Muthuraman Chettiar, : 44ITR710(SC) .We do not think that the authority cited lends any support tothe proposition at all. The analogy of aggregation of income under the head of business and in the process of computation of such income setting off loss cannot, in our opinion, apply to deductions allowable under Section 10(2). A reference to various items of allowance under this provision will show that the allowance of expenditure as a deduction is in respect of expenditure incurred in or related to earning of income, profits or gains. A proper outgoing as a revenue expenditure for the purpose of making the profits or gains in a particular business is only allowed as deduction. Section 10(2)(iii) does not depart from that principle. In fact it says that profits or gains will be computed after making allowance in respect of interest paid on the capital borrowed for the purpose of the business. That means, to our minds, that the borrowing, in order to come within the provision, should be for the purpose of a particular business, not borrowed for the particular business but applied for some other business. Commissioner of Income-tax v. Muthuraman Chettiar was really concerned with the scope of Sections 10 and 24 in a different context. All that was held in that case was that where an individual, who was ordinarily resident in India and carried on business in India, was also a partner of a firm carrying on business outside India, he was entitled to set off the loss incurred by him as partner of the foreign business against the profits and gains of the business carried on in India. That is on the principle of aggregation of income under a particular head, for the charge is on the total income and, in arriving at the total income, naturally losses will have to be set off. That this is the principle of the decision, emerges from the following observation in that case :
'It is worthy of note that though the profits of each distinct business may have to be computed separately, the tax is chargeable under Section 10, not on the separate income of every distinct business, but on the aggregate of the profits of all the businesses carried on by the assessee.'
4. It was on that principle it was held that, where an assessee carried on several businesses, he was entitled under Section 10 and not under Section 24(1) to set off losses in one business against the profits and gains in another. In passing we may also notice from the excerpt the indication that the profits of each distinct business may have to be computed separately and it is in such a computation the application of one or other relevant provision under Section 10(2) may arise. For instance, if an assessee carries on more than one business, a textile business and a cloth shop, and he incurs expenditure in the former which results in a loss but in the other business profits are derived, it is obvious, as we are inclined to think, that the expenditure incurred in carrying on the textile business cannot properly be allowed as a deduction from the profits and gains derived fromthe cloth shop. We do not think that the provision of Section 10(2) intends or comprehends such an application. L. M. Chhabda v. Commissioner of Income-tax, : 65ITR638(SC) to which our attention has been drawn, does not also bear on the precise question before us. This case is authority only for the proposition that business expenditure incurred in one of several business ventures subsequent to its closure is not allowable as a deduction under Section 10(1). The principle that an outgoing in respect of a closed business is not an admissible allowance, is extracted from the language employed by Section 10(1). The allowance under Section 10(2) is permitted only in respect of an expenditure incurred in a business carried on by an assessee. If the business is not carried on, obviously expenditure incurred after such closure cannot come in for allowance as a deduction. That does not touch the question whether expenditure incurred in one type of business can be claimed as allowable deduction from the profits of another business, though both the businesses are carried on by the same assessee. Milapchand R. Shah v. Commissioner of Income-tax, : 58ITR525(Mad) was a case in which a money-lending firm borrowed moneys on interest and made advances out of the borrowed moneys to the partners of the firm without charging any interest. This court held in the circumstances that the interest paid by the firm on the borrowings would not be an allowable deduction because the money advanced was not for the purpose of the firm's business. This again is not quite apposite to the present case. If the application of the borrowed money was not for the business at all, it is obvious that the interest paid on such borrowed money would be outside the ambit of Section 10(2)(iii). As we indicated earlier, the Tribunal is right in the view it took, namely, that the assessee is not entitled to a deduction of the sum of Rs. 5,321 under Section 10(2)(iii).
5. As regards the second point, we are not sure whether it was taken in that form before the Tribunal. In the course of its order, however, the Tribunal refers to an argument addressed on behalf of the assessee to the Appellate Assistant Commissioner, namely, that there was no justification to conclude that the investment in Nathan Muthu Thalanar Estate by the assessee came out of the borrowed money and the investment was practically covered by the assessee's own capital. There is no reference in the order of the Appellate Assistant Commissioner to this argument. Nor do we find any indication of the point having been taken before the Income-tax Officer. But Mr. Srinivasan assures us that he himself appeared before the Tribunal, and the point, as a matter of fact, was taken before it. In view of this, we think it but fair that the assessee is afforded an opportunity to raise it before the Tribunal. This is on the ground that the point having been raised, the Tribunal has not dealt with it in its order. Learned counsel refers to certain figures of the funds available with the assessee for the accounting year and says that, where an assessee had funds part of which came from borrowing and the rest constituted capital of the business, there is no presumption that moneys drawn out of such common funds and invested in some other business came only from the borrowed money and not from the capital fund. As a proposition, we think that no exception can be taken to it. There is no presumption either way and it is a matter to be established by evidence. If the entire investment of the share capital in Nathan Muthu Thalanar Estate came from the assessee's capital fund in the money-lending business, the question of allowance of interest as deduction may take a different complexion which will have to be examined on its merits by the Tribunal.
6. On that view of the matter we answer the question partly in favour of the assessee and partly against him. This means that it the expenditure by way of payment of interest was incurred in relation to the borrowing for the share capital of the firm, the assessee will not be entitled to its deduction from the profits derived from the money-lending business. If, on the other hand, it, is proved by the assessee on cogent evidence that the investment of share capital in the firm was not from the borrowed money but from his own other funds, then Section 10(2)(iii) may be applicable if its requisites are satisfied. For that purpose the Tribunal will have to dispose of the appeal afresh only on the second point we have adverted to in this order. No order as to costs.