1. These appeals are directed against the order of the DC(A) for the assessment years 1984-85 and 1985-86.
2. The first common ground is in regard to the disallowance of interest paid to M/s. P.R. Enterprises for both the years.
3. The assessee is an individual. She derives income from house property, other sources and share of profit from two firms, viz., M/s.
New Kampala Service Station and M/s. P.R. Enterprises. The assessee, in this case, took a loan from M/s. P.R. Enterprises, in which she is a partner. It was claimed before the ITO that the amount of loan taken from M/s. P.R. Enterprises had been invested in the firm of M/s. New Kampala Service Station where, too, she is a partner. She, accordingly, claimed deduction of interest paid to M/s. P.R. Enterprises as a deduction from the income. The ITO rejected the claim on the reasoning that there was no direct nexus between the loan taken from P.R.Enterprises and investment made by the assessee in M/s. New Kampala Service Station. Similar claim was made again for the assessment year 1985-86 and the assessee further claimed that the entire income of M/s.
P.R. Enterprises being from the interest paid by the assessee, at least the share income should be adjusted against the interest income of the firm M/s. P.R. Enterprises from which she was having 50% share of net profit. The ITO rejected this claim also. Aggrieved by the said disallowance, the assessee took up the matter before the learned DC(A) who, however, upheld the disallowance for both the years. Being aggrieved, the assessee has preferred these appeals before the Tribunal for both the assessment years.
4. Shri Prakash Jotwani, learned counsel for the assessee, vehemently objected to the order of the learned DC(A). According to him the assessee was a partner in both the firms - M/s. P.R. Enterprises and M/s. New Kampala Service Station. Even if the assessee's claim for deduction of interest against the income had not been accepted earlier, the interest should be allowed as a deduction against the assessee's share income from the firm of M/s. P.R. Enterprises. The assessee had a debit balance in both these years in the account of M/s. P.R.Enterprises, for which the interest had been paid and the same should be allowed as deduction from the income.
5. Even otherwise, it was claimed that the interest should be allowed as a deduction, considering the nature of income which the assessee derived from M/s. P.R. Enterprises. According to the learned counsel, the firm of M/s. P.R. Enterprises had income only from interest. Its gross income of Rs. 54,383.50 in the assessment year 1984-85 consisted of interest only. Similarly, for the assessment year 1985-86, the gross interest income of the firm, P.R. Enterprises, was Rs. 44,830.70. Out of that interest income, a sum of Rs. 30,384 represented interest received from the assessee and, therefore, the interest income of M/s.
P.R. Enterprises from Smt. Navani, the present assessee, represented approximately 56% of its gross total income. If the firm M/s. P.R.Enterprises, had not received any interest from the assessee, the share of profit of the assessee would have been, practically, nil. Similarly, in 1985-86, the interest paid by the assessee to the firm of M/s. P.R.Enterprises amounted to Rs. 34,030.70 as against the interest income of Rs. 44,830.70 earned by the firm. This represented approximately 76% of the gross total income of the firm. In that view of the matter, he vehemently urged that the interest paid by the assessee to the P.R.Enterprises should be allowed as a deduction from the share of profit of the assessee from the firm, M/s. P.R. Enterprises.
6. On the other hand, the learned departmental representative, Shri D.I. Mehta, strongly supported the order of the learned DC(A).
According to him, the disallowance of interest paid had been rightly made by the ITO on the reasoning that there had been no direct nexus between the loan taken by the assessee and her investment of that amount for the purposes of business. His contention was that since that finding had not been controverted at any stage, no interference was called for in the order of the learned DC(A) and, therefore, his order should be confirmed.
7. I have carefully considered the rival submissions in the light of the material on record. With regard to the investment of the amount borrowed from the P.R. Enterprises in the firm of New Kampala Service Station, the finding of the assessing officer that there was no direct nexus between the loan taken and the investment has not been controverted. The learned counsel for the assessee also did not bring any evidence before me to establish the nexus between the borrowed money and the investment made in the firm of M/s. New Kampala Service Station. In that view of the matter, this plea has to be rejected straightaway.
8. With regard to the second part of the argument put forward by the learned counsel for the assessee, it is seen that the argument is really attractive and novel and, on the surface, it looks quite plausible. But it is in such a case that a reasonable caution has to be exercised. The Supreme Court, in a number of cases, sounded similar warning and it has been pointed out in Gurcharan Singh v. State of Punjab 1972 SC 549 and in Prakash Chandra Pathak v. State of U.P. AIR 1960 SC 195 that, as on facts, no two cases could be similar and its own decisions, which were strictly on a question of facts, could not be relied upon as a precedent for decision of other cases.
9. In the case of Saroj Kumar Mazumdar v. CIT [1959] 37 ITR 242, the Supreme Court has observed that no decision can be straight precedent for any other and that decision can only be illustrative one and one should avoid the temptation to decide the cases by matching the colour of one case against the colour of another. Similarity is not enough, for even a single significant detail may alter the entire aspect. It is further observed in K.T.M.T.M. Abdul Kayoom v. CIT [1962] 44 ITR 689 (SC) that it is truism that each case must stand on its own facts.
10. Keeping in mind these warnings, let us carefully examine the contentions put forth by the learned counsel for the assessee.
As stated above, the assessee is a partner in the firm, M/s. P.R.Enterprises, having 50% share. The assessee borrowed money from this firm on which she was paying interest which formed substantial part of the income of that firm. Accordingly, the assessee derived 50% share income from that firm. Now, the payment of interest by the assessee to that firm was for the loan taken and the deduction of that interest paid by the assessee to that firm could only be determined against the utilisation of the loan money. If the borrowed money had not been used by the assessee for the purpose of business, it only assumed the character of personal loan and not for the purpose of business. Section 37 of the Act provides a very stringent test and the true test of an expenditure, laid out wholly and exclusively, for the purpose of trade or business is that it is incurred by the assessee as incidental to his trade for the purpose of keeping the trade going and of making it pay and not any other capacity than that of the trader. The section also provides that the expenditure should not be in the nature of capital or personal expenditure of the assessee. Unless the tests laid down by the Act are fulfilled, the interest paid by the assessee on the borrowed money from the firm has to be disallowed, as was done by the assessing officer.
11. With regard to the adjustment against the interest income of the assessee from the firm, the argument advanced by the learned counsel for the assessee is quite specious, but the same cannot bear scrutiny.
Under the Income-tax Act, the firm and the partners are two different entities. The assessee can only claim adjustment of the expenditure on interest paid if the amount spent or borrowed has been utilised for earning the income or invested in this firm for the purpose of business or as part of the mandatory capital to be contributed by the partners.
Such is not the case here.
On the other hand, the assessee, in this case, has borrowed money from the firm, the user of which has not been proved to be for the purpose of business. In such a case, it cannot be said that the earning of the share income by the assessee has direct connection with the loan taken by the assessee from the firm. The income of the firm and the interest paid by the assessee has limited nexus to the extent that the firm's income mainly consists of interest income. The assessee is also entitled to her share of income on such income of the firm, but her right to receive share income does not arise due to payment of interest to the firm. The payment of interest by the assessee to the firm is for a different reason and in a different capacity and the question of deduction of such interest from her income stands on a completely different footing. Such deduction of interest can only be allowed if borrowed money is utilised for the purpose of business or invested in a business of the assessee. Unless the borrowing has a direct nexus with the business of the assessee, the interest paid thereon cannot be deducted against the share income from the firm on the mere fact that the income of the firm is derived mainly from the interest paid to it by the assessee. However, if the assessee could, in any way, prove that the borrowed money has been incurred or invested for the purpose of business, then she will be entitled to the deduction of the interest from any income even though that specific expenditure or in vestment does not bear direct income during the year, as held in CIT v. Rajendra Prasad Moody [1978] 115 ITR 519 (SC). Since there is no evidence to show that the borrowed money, in this case, has been utilised for the purpose of the business, the claim of deduction cannot be allowed. I hold accordingly and uphold the order of the learned DC(A) on this point.
12. The next ground, relevant only for the assessment year 1985-86, is in regard to the disallowance of interest amounting to Rs. 975, paid to Bombay Mercantile Bank. The claim was disallowed by the assessing officer on the ground that no details had been furnished to justify the claim. This disallowance was upheld by the learned DC(A) on the same reasoning that no details had been furnished before her. The details have neither been placed before the Tribunal also. In that view of the matter, the disallowance is sustained.