Karnataka High Court
M.L.G. Enterprises vs Commissioner Of Income-Tax on 11 September, 1986
Equivalent citations: [1987]167ITR11(KAR), [1987]167ITR11(KARN), 1987(1)KARLJ376
Author: K. Jagannatha Shetty
Bench: K. Jagannatha Shetty
JUDGMENT K. Jagannatha Shetty, J.
1. This is reference under section 256(2) of the Income-tax Act, 1961. The following question has been referred by Tribunal :
"Whether, on the facts and in the circumstances of the case, the Tribunal was right in disallowing the interest paid to the partners while computing the capital gains ?"
2. The assessment year is 1971-72. The assessee which is an unregistered firm had purchased a piece of land on September 2, 1964, with an intention to construct a theatre thereon. But that proposal was given up as there was no hope of getting a licence. But the levelling work was carried out for improving the property, although no construction took place. After a lapse of nearly six years, the land was sold to M/s. East West Hotels Ltd., under a registered sale deed dated June 30, 1970, for Rs. 7,74,250.
3. The assessee offered for assessment as capital gains a sum of Rs. 2,03,910 by deducting from the sale price, the original cost of the land which was Rs. 2,00,000 and cost of stamp paper and other charges of Rs. 14,361. The assessee also deducted interest amount of Rs. 56,362 paid to the partners from the date of purchase to the date of purchase to the date of sale on capital.
4. The Income-tax Officer held that in computing the capital gains, only the cost of acquisition of the asset and cost of improvement to the asset and expenditure incurred wholly and exclusively in connection with the transfer of the asset can be deducted. He, therefore, did not permit the deduction of the interest paid to the partners on capital. He accordingly refused to deduct the sum of Rs. 56,362 in computing the capital gains.
5. This view of the Income-tax officer has been shared by the Appellate Assistant Commissioner and the Appellate Tribunal by dismissing the appeal preferred by the assessee.
6. Before us, Mr. Sarangan, learned counsel for the assessee, urged that although the payment made to the partners was described as interest on capital, in substance it went to the cost of acquisition of the capital asset and, therefore, it is liable to be deducted while computing the capital gains under section 48(ii). Learned counsel, in support of his contention, wanted to draw an analogy between the capital invested and the amount advanced by the partners. According to learned counsel, interest paid on borrowed capital for the purpose of acquiring the asset would go to increase the cost of acquisition and, therefore, it should be deducted.
7. The example given by learned counsel may be correct, but that principle cannot be extended to the interest paid on capital. May be the capital contributed by the partners was utilised for purchasing the asset of the partnership firm, but it is not the same thing to state that the interest paid on such capital out of the profits would go to augment the cost of acquisition of the capital asset.
8. Learned counsel then referred us to the provisions of section 13(c) of the Partnership Act, 1932, which authorises, subject to the contract between the partners, payment of interest on the capital subscribed by the partners and such interest shall be payable only out of the profits. It is true that the partners can receive interest on the capital subscribed by them subject to contract between them. But the right to receive interest under the terms of the partnership is one thing and the deduction of such interest for computing the capital gains is another thing. One has no relevance to the other.
9. We, therefore, answer the question in the affirmative and against the assessee.