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C.I.T. v. M/S Hari Shanker Subash Chand - INCOME TAX REFERENCE No. 22 of 1997 [2007] RD-AH 14118 (17 August 2007)


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Court No. 2

Income Tax Reference No. 22 of 1997

Commisisoner of Income Tax, Meerut


M/s Hari Shanker Subhash Chand, Meerut.

Hon'ble R.K.Agrawal, J.

Hon'ble Vikram Nath, J.

The Income Tax Appellate Tribunal, Delhi has referred the following question of law under section 256(1) of the Income Tax Act, 1961 (hereinafter referred to as the Act) for opinion of this Court:

"Whether on the facts and circumstances of the case the Tribunal was justified in holding that interest paid by the assessee AOP to its members was a legitimate business expenditure and, therefore, allowable as a deduction?"

The reference relates to the Assessment Year 1987-88.

Briefly stated the facts giving rise to the present reference are as follows:

The respondent assessee, in this case, is an AOP deriving income from purchase and sale of country liquor. The Assessing Officer in the course of the assessment proceedings noted that deduction had been claimed on account of interest paid to the members of the AOP on their capital contributions. He rejected the claim on the ground that no relationship of creditor and borrower had been created and no interest was, therefore, allowable. On further appeal, however, the Commissioner of Income Tax (Appeals) allowed deduction on the ground that whereas interest paid by a firm to its partners was not allowable under section 40(b), the same provision did not cover an AOP, more so, when the new provision viz. section 40(ba) had come into force w.e.f. 1.4.1989. On further appeal the Tribunal confirmed the view taken by the Commissioner of Income Tax (Appeals).

We have heard Sri A.N.Mahajan, learned standing counsel for the Revenue and Sri Pawan Shri Agarwal, learned counsel appearing for the respondent assessee.

We find that the question raised herein is squarely covered by the decision of this Court in the case of Commissioner of Income Tax vs. Kesho Ram and others (2000) 245 ITR 733 wherein it has been held that the interest paid to the members of the AOP on capital borrowed from them is an allowable deduction.

Respectfully following the aforesaid decision we answer the question referred to us in the affirmative, i.e. in favour of the assessee and against the Revenue. There shall, however, be no order as to costs.




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