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TMI Blog1980 (8) TMI 51X X X X Extracts X X X X X X X X Extracts X X X X ..... gross share of profit in the said firm came to Rs. 2,20,804 and the ITO reduced it by Rs. 1,44,000 as representing the interest deductible under s. 67(3) of the I.T. Act, 1961. In the course of the appellate proceedings before the AAC, the ITO requested the AAC by a letter dated 1st of September, 1971, that the assessment be enhanced by Rs. 1,44,000 as it was deducted from the share income of the firm erroneously. Apparently, the ITO's plea was that the interest was not allowable as the amount was borrowed by the assessee and given to the firm and utilised for the purpose of the firm was not for the purposes of the firm's business. On the other hand, the assessee resisted the ITO's plea for enhancement on the ground that the interest had been allowed rightly by the ITO, though it was admitted that the amount borrowed was passed on to the firm of M/s. Soorajmull Nagarmull for the payment of taxes. Reliance was also placed before the AAC on a decision of the Madhya Pradesh High Court. The AAC did not accept the assessee's contention that the interest of Rs. 1,44,000 was rightly allowed in the original assessment. Since the amount borrowed by the assessee was utilised by the firm, acc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nvestment in the firm, according to the majority members of the Tribunal, was deductible in its entirety from his business income, though he might have income from other sources like dividends and property income from the firm. On the construction of s. 67 of the I.T. Act, the majority members of the Tribunal, after referring to several discussions, observed that it was not safe to go by the literal meaning of the expression investment in every case without reference to the context in which it appeared. Section 67(3) permitted deduction of interest on capital borrowed for the purpose of investment in the firm. Any act of investment in the firm, according to the majority members of the Tribunal, would amount to laying out money for profit or with an expectation to derive income from the firm immediately or in the near future. The dictionary meaning of the expression mainly deals with the direct investment in properties, shares, etc. Investment in the firm was an indirect mode of laying out money for profit or routing the funds to the firm which would utilise the funds in the manner it thought best. Therefore, according to the majority members of the Tribunal, all that was required u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... x liabilities of Rs. 94 lakhs before the end of November, 1965. It was admitted that there was no written agreement between the assessee and the other partners of the firm with regard to these advances made by him to the firm for payment of taxes. It was, however, asserted on behalf of the assessee that there was an oral agreement among the partners of the firm, according to which, the assessee had to meet on behalf of the firm the tax liability to the extent of Rs. 72 lakhs which he had paid to the Reserve Bank of India on the 29th November, 1965. The assessee was, therefore, entitled to interest at 4 1/2 per, cent. per annum on the capital was advanced by him and advanced likewise required to pay 4 1/2 per cent. on the debit balance of the firm. It was admitted that the certificate from the firm in this connection could not be obtained earlier on account of the disputes among the two groups of partners, viz., Bajorias and Jalans. In that background, the majority members of the Tribunal were of the view that as the firm was making use of the concession extended to it by s. 68 of the Finance Act of 1965, timely payment of the reduced tax liability was a considerable advantage and b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rmull or not so as to enable the firm to make an investment or to discharge its statutory liabilities for the payment of income-tax, it was not possible to accept the conclusion arrived at by the majority members of the Tribunal, and in view of the decision of the Calcutta High Court in the case of Mannalal Ratanlal v. CIT [1965] 58 ITR 84, which we shall presently note, the learned judicial Member was of the view that the assessee was not entitled to a deduction and he was, therefore, of the opinion that the payment of interest by the assessee could not be allowed as contemplated under the section while determining his taxable income. Upon these facts, the question indicated above has been referred to this court. It is necessary in this connection to refer to s. 67(3) of the I.T. Act, 1961, which reads as follows: " 67. (3) Any interest paid by a partner on capital borrowed by him for the purposes of investment in the firm shall, in computing his income chargeable under the head ' Profits and gains of business or profession' in respect of his share in the income of the firm, be deducted from the share." We may mention that s. 67 deals with the method of computing the partner's ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that business, etc. We see no reason for making a distinction between these two types of cases. Of course, suitable safeguards should be provided against abuse of this allowance by assessees who, having sufficient capital of their own, resort to use it as a measure for avoidance of tax. " Section 10(2)(iii) of the Indian I.T. Act, 1922, provided as follows: " 10. (2) (iii) in respect of capital borrowed for the purposes of the business, profession or vocation, the amount of the interest paid. " The other relevant sections with which we are concerned are ss. 36, 37 and 57 of the I.T. Act, 1961, which read as follows: " 36. Other deductions.-(1) ...... (iii) the amount of the interest paid in respect of capital borrowed for the purposes of the business or profession." " 37. General.-(1) Any expenditure (not being expenditure of the nature described in sections 30 to 36 and section 80VV and not being in the nature of capital expenditure or personal expenses of the assessee), laid out or expended wholly and exclusively for the purposes of the business or profession shall be allowed in computing the income chargeable under the head Profits and gains of business or profession'". ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... artner for capital borrowed by him for the purpose of investment in the firm should, in computing his income chargeable under the head ' Profits and gains of his business' and in respect of the share in the firm, be deducted from his share. The Division Bench of this court was of the view that in view of the express provision of the section, the Tribunal was not (sic) right in holding that the section did not stipulate that interest would not be admissible if the amount given to the firm was not used by the firm for the purpose of its business or for payment of taxes. Though this particular argument, which was advanced by the revenue before us at this stage, that it must be invested as capital in the firm, was not advanced before the Division Bench of this court in the aforesaid case, we find that the requirement of deduction does not enjoin that it should be invested qua capital but it should only be capital, that is to say, the capital amount borrowed which should be the capital of the lender or the investor but need not be the capital of the invested company or concern. That was the requirement and if that carried interest or obligation to pay interest then that was investment, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ome-tax paid by the assessee could be deducted as a business expenditure. The reason was that the income-tax was not deductible item to be allowed for arriving at the net profits of the assessee. It was not an expenditure for the purpose of earning profits; it was on the contrary a case of application of profits after that income had been earned and not an expenditure necessary to earn such profits. The Patna High Court also held in that case that interest on money borrowed for payment of tax was not a legitimate deduction in computing the business profits. The borrowing of money by an assessee for payment of advance tax was not made for any purpose of commercial expediency but for the discharge of its statutory obligation imposed upon him under s. 18A of the Indian I.T. Act, 1922. The interest paid by an assessee, the Patna High Court was of the view, on money borrowed by him for payment of advance tax could not be deducted under the provisions of s. 12(2) of the Indian I.T. Act, 1922. The Division Bench of the Calcutta High Court, in the case of Mannalal Ratanlal v. CIT [1965] 58 ITR 84, mentioned hereinbefore, was in agreement with the view of the Patna High Court. Learned advoc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed that the business carried on by a firm was business carried on by the partners. Profits of the firm were profits earned by all the partners in carrying on the business. The share of the partner was business income in his hands for the purpose of s. 10(1) of the Indian I.T. Act, 1922, and being business income, expenditure necessary for the purpose of earning that income and appropriate allowances were deductible therefrom in determining the taxable income of the partner. It was held that the assessee, who was a partner in four firms but did not carry on any independent business, was entitled to deduct from his share of the profits from the firms amounts paid as salary and bonus to staff, expenses for maintenance and depreciation of motor cars and travelling expenses expended by him in earning the income from the firms. Now, the facts, as we have noted, were entirely different, where the Supreme Court was dealing with the assessee who was a partner of the firm. His income from the firm was assessable in his hands. In earning the income from the firm, he had incurred certain expenses, viz., salary and bonus to its staff, expenses for maintenance and depreciation of motor cars and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... m of Rs. 5.5 lakhs from an overdraft account maintained with a bank for her business and paid it to the college. The balance of the promised donation, viz., Rs. 4.5 lakhs, was treated as a debt due by her and accordingly she was debited with interest with effect from October 21, 1955. The question was whether the interest paid by the assessee to the bank on the sum of Rs. 5.5 lakhs for the assessment years 1957-58 to 1959-60, and the interest credited to the college on the balance of Rs. 4.5 lakhs for the assessment years 1958-59 and 1959-60, were allowable expenditure in computing her business profits. The assessee had claimed that she had preferred to draw on the overdraft account for the purpose of paying the college in order to save her income earning assets, viz., the shares, which she would otherwise have had to sell. The Appellate Tribunal had held that the sum of Rs. 5.5 lakhs overdrawn from the bank was not borrowed for business purposes and that as regards the balance of Rs. 4.5 lakhs there was at best a promise and a mere credit entry in her accounts did not amount to a gift or charity for trust; and that, therefore, neither interest was allowable as a deduction under s. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ase of CIT v. A. W. Figgies and Company [1953] 24 ITR 405, the Supreme Court had to consider some of the aspects under s. 25(4) of the Indian I.T. Act, 1922, and about the relationship of the partner and the firm under the income-tax law, at pp. 408 and 409 of the report, the court observed as follows: "It is true that under the law of partnership a firm has no legal existence apart from its partners and it is merely a compendious name to describe its partners but it is also equally true that under that law there is no dissolution of the firm by the mere incoming or outgoing of partners. A partner can retire with the consent of the other partners and a person can be introduced in the partnership by the consent of the other partners. The reconstituted firm can carry on its business in the same firm's name till dissolution. The law with respect to retiring partners as enacted in the Partnership Act is to a certain extent a compromise between the strict doctrine of English Common Law which refuses to see anything in the firm but a collective name for individuals carrying on business in partnership and the mercantile usage which recognizes the firm as a distinct person or quasi-corpor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f a firm proceeds on the basis that it is a distinct assessable entity. In that respect it is distinct even from its partners : CIT v. A. W. Figgies and Company [1953] 24 ITR 405 (SC). As an assessable entity it is also distinct from an HUF, which in itself is regarded as a separate unit of assessment under s. 3 Raja Bejoy Singh Dudhuria v. CIT [1933] 1 ITR 135 (PC). For the purposes of the question before us it recks little that the very individuals who constituted the HUF now constitute the appellant-firm. When depreciation allowance was allowed to the HUF in its assessment proceedings, it was a step taken in determining the taxable income of the family. The depreciation allowed to the family cannot be regarded as depreciation allowed to the appellant. We must ignore entirely the circumstance that depreciation has been allowed to the HUF in the past." The right to recover the dues under the I.T. Act from a firm were separate from the right to recover the dues from the partners. In this context, it was so held by the Supreme Court in the case of CST v. Radhakisan [1979] 118 ITR 534. So far as income-tax was concerned, the same view was expressed by the Full Bench of the Kerala Hi ..... X X X X Extracts X X X X X X X X Extracts X X X X
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