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TMI Blog1991 (9) TMI 67X X X X Extracts X X X X X X X X Extracts X X X X ..... amounts standing to their respective credits in the capital account of the partnership; those amounts were not earning any interest. The withdrawn amounts were advanced to their respective wives, minor children and Hindu undivided families, who, in turn, deposited them with the firm for interest at the rate of 15% per annum. The interest thus paid by the firm was deducted from the income of the firm (assessee herein), during the assessment year 1982-83. But the Income-tax Officer disallowed the deductions, relying on section 40(b) of the Act. The Commissioner (Appeals), however, allowed the appeal filed by the assessee and excluded the interest paid as a valid deduction. This appellate order was affirmed by the Appellate Tribunal. Hence, this reference. The genuineness of the transactions is not in question. The Revenue has relied on section 40(b), as it stood during the relevant assessment year, to question the deduction claimed by the assessee-firm. As per section 40(b), in the case of any firm, any payment of interest, salary, bonus, commission or remuneration made by the firm to any partner of the firm shall not be deducted in computing the chargeable income of the firm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lary made by the firm to any partner is not deductible is absolute in its terms and it is applicable to all cases irrespective of the character in which a person has become a partner of a firm. The principle enunciated in Dhanwatey's case [1968] 68 ITR 365 (SC) , and the principle underlying section 40(b) of the Act are entirely different from one another. In the first case the reason for treating the remuneration received by a karta, which is related to the family funds contributed as capital of the firm, as part of the income of the Hindu undivided family is that the karta has to be regarded as having entered into the partnership for the benefit of the Hindu undivided family and as between him and the other members of the family, he would be accountable for all profits or remuneration received by him. The object of enacting section 40(b), however, is entirely different. Ordinarily, any salary paid to a partner for the services rendered by him to the firm in accordance with a bona fide agreement entered into by and amongst the partners would have been deductible as expenditure under section 37 of the Act but for section 40(b). The question whether an agreement to pay salary t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ue). We do not think that any case is made out for reconsideration of the judgments of this court in Addl. CIT v. Vallamkonda Chinna Balaiah Chetty and Co. [1977] 106 ITR 556 and Terla Veeraiah v. CIT [1979] 120 ITR 502 for two reasons : Firstly, the view taken by this court finds support in the judgments of the Gujarat High Court and Madras High Court above referred to ; and, secondly, the principle enunciated by this court is now statutorily recognised by the Taxation Laws (Amendment) Act of 1984, which will be effective from the assessment year 1985-86. By section 10 of the above Amendment Act, three Explanations were inserted. Explanations 2 and 3 deal with the matter under consideration. The effect of these Explanations is : (a) if a person is a partner in a firm in a representative capacity and if such partner lends to the partnership monies belonging to him individually, then the interest paid to such partner on the monies lent by him is not liable to be added back under section 40(b) of the Act; and (b) similarly, if a person is a partner in his individual capacity and if such partner lends to the partnership monies belonging to the Hindu joint family of which he is the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t of interest to the Hindu undivided family through the partner who was the karta of the Hindu undivided family came up for consideration in respect of the assessment year 1976-77. The Madhya Pradesh High Court applied the Explanations inserted to section 40(b) by the Amendment Act as explaining the real purport of section 40(b). The High Court also referred to an earlier circular issued by the Board governing the fact situation. At page 127, the Bench concluded: Though this Explanation is not applicable to the present case as it was brought into effect from April 1, 1985, still the Explanation so added points out the effect of interest paid in such cases. That apart, it was not disputed that there is a circular issued by the Department, which is binding on the Department. The High Court points out at page 125 that the view expressed by the Gujarat High Court in CIT v. Sajjanraj Divanchand [1980] 126 ITR 654 , was sought to be challenged in appeal before the Supreme Court, but the Supreme Court refused to grant leave to appeal. The Gujarat view was followed by the Andhra Pradesh High Court in N. T. R. Estate's case [1986] 157 ITR 285 referred to above, and the Reve ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 985, is its normal function of explaining that which is already contained in clause (b). The same question came up before the Punjab and Haryana High Court for the assessment year 1978-79 in Hindustan Steel Forgings v. CIT [1989] 179 ITR 280 . The Bench negatived the Revenue Is contention in view of the circular issued by the Board. The Bench also held that the Explanations inserted to section 40(b) were clarificatory in nature. At page 282, the Bench observed: A reading of the same shows that the amendment has clarified that where a person is a partner in his representative capacity, interest paid to him in his individual capacity will not be disallowed under the abovementioned provisions and vice versa. Therefore, it is clear that the amendment brought in by the Amendment Act, 1984, was only clarificatory with view to explain what was hidden so as to make it apparent to the naked eye. Such an amendment is always considered retrospective so that what looked hidden hithertofore should be considered as apparent and if that is so, the clarification which has been brought about by the amendment should be read as if the unamended provision was also to be read in the same way ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d. In Central Bank of India v. Their Workmen [1959] 29 Comp Cas 367 (SC) , the proviso introduced in section 10(b)(iii) of the Banking Companies Act, 1949, by the amending Act of 1956, though held to be remedial, was not applied for a period anterior to the date of operation of the amending Act. S. K. Das J., in that case, observed (at p. 392): 'A remedial Act, on the contrary, is not necessarily retrospective ; it may be either enlarging or restraining and it takes effect prospectively, unless it has retrospective effect by express terms or necessary intendment.' Section 10 of the Taxation Laws (Amendment) Act, 1984, neither is, nor purports to be, declaratory or retrospective from a date prior to the assessment year 1985-86. At least, if the amending Act had been made retrospective, one could have thought it was a clarificatory piece of legislation. But the Legislature has given effect to the amending Act from 1985-86. This would mean that the Explanations as inserted by the Taxation Laws (Amendment) Act, 1984, would not apply to earlier assessment years. In spite of the divergence of views expressed by various High Courts as to the scope of section 40(b), ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ctment, and consequently, we find that the function of an Explanation to a statutory provision is: (c) to provide additional support to the dominant object of the Act in order to make it meaningful and purposeful; (d) to help or assist the court in interpreting the true purport and intendment of the enactment, in order to suppress the mischief and advance the object of the Act where some gap is left which is relevant for the purpose of the Explanation though it cannot in any way interfere with or change the enactment or any part thereof. We have quoted elaborately from several decisions to highlight the problem posed by the wording of section 40(b) without the Explanations now added to it. The words any payment . . . made by the firm to any partner , if read literally as conveying the physical act of payment without reference to the nature of the payment and the capacity in which the partner received the payment, is likely to lead to anomalous results. Suppose, a partner has received interest on behalf of his friend who has gone abroad; the physical payment of the interest to the partner as an agent of his friend would lose all its legal significance, if such a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... deeming clause ; if the intention of the Legislature is not fully conveyed earlier or there has been a misconception about the scope of a provision, the Legislature steps in to explain the purport of the provision ; such an Explanation has to be given effect to, as pointing out the real meaning of the provision all along. Mr. Raghavendra Rao, learned counsel for the Revenue, cited D. S. Nakara v. Union of India, AIR 1983 SC 130 , while urging that retrospectivity should not be attributed to the Explanations added to section 40(b). In the said case, the Supreme Court was concerned with the scope of the Pension Scheme and whether the said scheme would benefit only those persons who retired after a particular date. Apart from considering the scope in the background of article 14 of the Constitution, the Supreme Court also held that, having regard to the nature of the pension and the purpose behind its payment, the particular date of retirement of a government servant was irrelevant to extend the benefit of the scheme. It was not a case of making the scheme retroactive at all. The Supreme Court observed that (at p. 143). A statute is not properly called a retroactive statute beca ..... X X X X Extracts X X X X X X X X Extracts X X X X
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