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TMI Blog1995 (4) TMI 16X X X X Extracts X X X X X X X X Extracts X X X X ..... e relates to the assessment years 1975-76 and 1976-77. In making the assessments, the Income-tax Officer disallowed the gross interests paid to the partners by the assessee-firm of Rs. 54,775 and Rs. 61,827, respectively, under section 40(b) of the Income-tax Act, 1961, rejecting the assessee's plea that when a partner receives as well as pays interest to the firm only the net interest should be disallowed under section 40(b) of the Act. The assessee preferred an appeal to the Appellate Assistant Commissioner. The Appellate Assistant Commissioner allowed the appeal of the assessee holding that only the net interest paid by the partner should be disallowed under section 40(b) of the Act. On further appeal preferred by the Revenue, the Income-tax Appellate Tribunal concurred with the view of the Appellate Assistant Commissioner that only the net interest paid by the party should be disallowed under section 40(b) of the Act, following the decision of the Tribunal in the case of another assessee in I. T. A. No. 1237/(Mds) of 1977-78, dated August 5, 1978. Mrs. Aparna Nandakumar, learned counsel appearing on behalf of the Revenue, strenuously urged that the Income-tax Appellate Tribu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nation 1.-- Where interest is paid by a firm to any partner of the firm who has also paid interest to the firm, the amount of interest to be disallowed under this clause shall be limited to the amount by which the payment of interest by the firm to the partner exceeds the payment of interest by the partner to the firm. " Interpreting section 40 of the Act, the Supreme Court has observed as follows : " Section 40 imposes a restriction on the deductibility of certain outgoings and expenses which are, otherwise, enabled under sections 30 to 39 of the Act and constitutes an exception to these sections. Clause (b) of section 40 is analogous, with some enlargement, to section 10(4)(b) of the predecessor Act of 1922. The prohibition in section 40 against the deductibility of certain outgoings is in mandatory terms. It is this aspect that has loomed large in the reasoning supporting the view accepted by the Madras High Court in Sanharalinga Nadar's case [1984] 147 ITR 332 and emphasised by learned counsel for the Revenue. The reasoning of the Madras High Court in that case and of the Andhra Pradesh High Court in CIT v. T. V. Ramanaiah and Sons [1986] 157 ITR 300, illustrate the rival p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aid by the partnership firm to the partner.'. . . ." Explanation 1 in clause (b) of section 40 was introduced in the Act by the Taxation Laws (Amendment) Act, 1984. As the assessment in the instant cases relates to the assessment years 1975-76 and 1976-77, the Explanation 1 in clause (b) of section 40 inserted by the Taxation Laws (Amendment) Act, 1984, may not be strictly applied for the same. With regard to the Explanation, the Supreme Court in Keshavji Ravji and Co. v. CIT [1990] 183 ITR 1, observed as follows : " It is also true that an Explanation .... be introduced by way of abundant caution in order to clear any mental cob-webs surrounding the meaning of a statutory provision spun by interpretative errors and to place what the Legislature considers to be the true meaning beyond any controversy or doubt. Hypothetically, that such can be the possible purpose of an 'Explanation' cannot be doubted. But the question is whether, in the present case, Explanation 1 inserted into section 40(b) in the year 1984 has had that effect. The 'Notes on Clauses' appended to the Taxation Laws (Amendment) Bill, 1984, say that clause 10 which seeks to amend section 40 will take effect fr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the debt due from the insolvent to him under a pari passu payment. This principle was recognised by this court in Official Liquidator v. (Smt.) Lakshmikutty (V.) [1981] 51 Comp Cas 566 ; [1981] 2 SCR 349. The set-off in this case is, no doubt, the result of a statutory provision. In the case of partners, the special legal incidents of their relationship would substitute for the statutory provision and govern the situation. Indeed, even the idea of a setoff itself, which presupposes a duality of entities, may be out of place in the very nature of the relationship between a firm and its partners where the former is a mere compendious reference to the latter. But even to the extent the income-tax law which identifies the firm as a distinct entity and unit of assessment goes, the idea of set-off may be invoked in view of the mutuality implicit in the putative duality inherent in deeming the firm as a distinct entity under the Act for certain purposes. The fiction may have to be pushed to its logical conclusion. The decision of the Madras High Court in Sankaraliniga Nadar's case [1984] 147 ITR 332, speaks of income-tax and equity being strangers. To say that a court could not resort t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h Court, Karnataka High Court, Rajasthan High Court and the Punjab and Haryana High Court to the effect that where a firm pays interest to its partner and the partner also pays interest to the firm, only the net amount of interest paid by the firm to the partner is liable to disallowance under section 40(b) of the Act and rejected the opinion of this court expressed in CIT v. O. M. S. S. Sankaralinga Nadarand Co. [1984] 147 ITR 332. The ruling of this court in Sankaralinga Nadars case [1984] 147 ITR 332 was given on December 7, 1982, while the orders of the Income-tax Appellate Tribunal in the instant cases are dated August 5, 1978, and December 14, 1978, respectively, before the decision of this court in Sanharalinga Nadar's case [1984] 147 lTR 332. The Appellate Tribunal followed the decision of the Allahabad High Court and the Board's circular and held that the net interest received from the partner should be disallowed under section 40(b) of the Act. We find no error of law in the above view expressed by the Appellate Tribunal, in view of the above ruling of the Supreme Court. We answer the question referred to us in the two cases of reference, in the affirmative against the Re ..... X X X X Extracts X X X X X X X X Extracts X X X X
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