9911796707
TMI Blog1997 (3) TMI 10X X X X Extracts X X X X X X X X Extracts X X X X ..... at Shanti Kumar Jain, Ashok Kumar Jain, Raj Kumar Jain and Niranjan were partners in the firm in their capacity as karta of the respective Hindu undivided family. They have advanced monies to the assessee-firm in their individual capacity. The assessee-firm paid interest to them on the investments made in their respective individual capacity. It is the further case of the assessee-firm that it has maintained two separate ledger accounts of the partners, one of individual as loan creditor and another of karta of Hindu undivided family as partners in the firm. The sources of the money, according to the assessee, are quite separate. The assessee-firm claimed that the interest paid to them shall not be included while computing the income charge ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the view that the said Explanation is merely declaratory in nature and that, therefore, even for the assessment years prior to April 1, 1985, the position of law should be understood to be the same. In support of this proposition, the High Court relied upon the fact that ordinarily the purpose of an Explanation is to clarify that which is already enacted and not to introduce something new. The High Court opined that the Explanation was inserted by Parliament with a view to settle the controversy as to 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 clau ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... product of agreement to share the profits of a business. "Firm" is a collective noun, a compendious expression to designate an entity, not a person. In income-tax law, a firm is a unit of assessment, by special provisions, but is not a full person which leads to the next step that since a contract of employment requires two distinct persons, viz., the employer and the employee, there cannot be a contract of service, in strict law, between a firm and one of its partners. So that any agreement for remuneration 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 par ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... all within the mischief of clause (b) of section 40. In this view of the matter, we agree with the view taken by the Rajasthan High Court in Gajanand Poonam Chand and Bros' case [1988] 174 ITR 346 that Explanation 2, in the context of clause (b) of section 40, is declaratory in nature. Accordingly, we allow this appeal, set aside the judgment of the High Court and answer the question referred under section 256 in the affirmative, i.e., in favour of the assessee and against the Revenue. "
In view of the above pronouncement of this court, we do not think that this question requires any further elucidation. Accordingly, the question is answered in favour of the assessee and against the Revenue. There will be no order as to costs. X X X X Extracts X X X X X X X X Extracts X X X X
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