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TMI Blog1996 (12) TMI 2X X X X Extracts X X X X X X X X Extracts X X X X ..... P. JEEVAN REDDY. and K. S. PARIPOORNAN. JUDGMENT The judgment of the court was delivered by B. P. JEEVAN REDDY J.--- Clause (b) of section 40 of the Income-tax Act, 1961, specifies one of the amounts which shall not be deducted in computing the income chargeable under the head " Profits and gains of business or profession ". As it stood at the relevant time, it read thus : " 40. Amounts not deductible.---Notwithstanding anything to the contrary in sections 30 to 39, the following amounts shall not be deducted in computing the income chargeable under the head 'Profits and gains of business or profession',---... (b) in the case of any firm, any payment of interest, salary, bonus, commission or remuneration made by the firm to an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... est paid to a partner on the amounts deposited by him in his individual capacity is hit by clause (b) where the partner is a partner not in his individual capacity but as representing a Hindu undivided family (HUF). The question which was referred by the Tribunal for the opinion of the High Court in this behalf read (see [1979] 117 ITR 121, 122) : " Whether the Tribunal was correct in allowing the assessee's claim for interest paid on the credit balance in the individual account of Sri Rajendra Kumar? " The assessee, Brij Mohan Das Laxman Das, is a registered partnership firm having three partners. One of them is Rajendra Kumar. He was a partner as the karta of and representing his Hindu undivided family. The partnership firm maintained ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... appeal. The High Court has, however, certified the case under section 261 of the Act. It may be mentioned that Explanations 1, 2 and 3 to the above clause were added by the Taxation Laws (Amendment) Act, 1984, with effect from April 1, 1985. Explanation 2 expressly provides that where an individual is a partner in a firm on behalf of or for the benefit of any other person, any interest paid by the firm to such individual otherwise than as partner in a representative capacity, shall not be taken into account for the purposes of clause (b). It is, therefore, clear that with effect from April 1, 1985, the question of the nature involved herein would not arise. Where a person is a partner in a representative capacity, i.e., as representing a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o the meaning and effect of the said clause among the several High Courts and that the Explanation puts a seal of approval on the view taken by the majority of the High Courts. The High Court also referred to the definition of " person " in clause (31) of section 2. It pointed out that the definition shows clearly that an individual, a Hindu undivided family and a firm are distinct persons/entities for the purpose of the Income-tax Act. The High Court, therefore, concluded that since an individual and a Hindu undivided family are two distinct entities for the purpose of the Act, clause (b) of section 40 has no application where the interest is paid to the partner on deposits made by him with the firm in his individual capacity where such pe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... muneration of a partner for taking part in the conduct of the business must be regarded as a portion of the profits being made over as a reward for the human capital brought in. Section 13 of the Partnership Act brings into focus this basis of partnership business. " This court also quoted with approval the passage from Lindley on the Law of Partnership to the effect : " In point of law, a partner may be the debtor or the creditor of his co-partners, but he cannot be either debtor or creditor of the firm of which he is himself a member, nor can he be employed by his firm, for, a man cannot be his own employer ". The provisions in Chapters III and IV of the Partnership Act amply define and delineate the duties, obligations and rights of th ..... X X X X Extracts X X X X X X X X Extracts X X X X
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