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TMI Blog1993 (1) TMI 107X X X X Extracts X X X X X X X X Extracts X X X X ..... 52 ITR 423 which is against the assessee. He held that even Explanation 2 to section 40(b) inserted by the Taxation Laws (Amendment) Act, 1984, is with effect from 1-4-1985 and, therefore, not applicable for the assessment years 1983-84 and 1984-85. In the circumstances, the CIT directed the ITO to consider the interest payments in the light of the provisions of section 40(b) as interpreted by the Karnataka High Court in the case of Khoday Eswarsa Sons and revise the orders of assessment, both in the case of the firm and also the partners as per provisions of law. 2. At the time of hearing the learned counsel for the assessee stated that since the assessment year 1973-74 the partners joined in their representative capacity of their respective HUFs and the share income from the firm was assessed in the hands of the HUF while interest paid on the individual funds of the partners was assessed in the status of individual. In this connection, reliance was placed on the decision of the Andhra Pradesh High Court in the case of N.T.R. Estate v. CIT [1986] 157 ITR 285 wherein it has been held that the Explanations inserted by the Taxation Laws (Amendment) Act, 1984, with effect from the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he case laws cited. The judgment of the Karnataka High Court in the case of Khoday Eswarsa Sons was delivered on 13-9-1984 and that case related to assessment year 1974-75. Therefore, that judgment related to the pre-amendment period, i.e. before the insertion of the three Explanations by the Taxation Laws (Amendment) Act, 1984, w.e.f 1-4-1985. In that case, one of the partners of the firm namely, Shri K. Laxmanasa, died and his widow Smt. Gangamma was co-opted as a partner since she represented the estate of her deceased husband. She contributed, in her individual capacity, some amount to the firm and the firm paid interest on that amount which was disallowed under section 40(b). The contention of the assessee was that section 40(b) was not applicable to such interest payment as it was paid to her in her individual capacity on her own funds and not on any assets belonging to the deceased partner. On appeal, the Appellate Asstt. Commissioner allowed the claim of the assessee. On appeal by the revenue the Tribunal concurred with the view of the AAC. On reference by the revenue the High Court held that the prohibition contained in clause (b) of section 40 is absolute and makes no d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1984,w.e.f. 1-4-1985.Therefore, we up hold the validity of assumption of jurisdiction by the CIT under section 263 of the Income-tax Act, 1961. 6. Coming to the merits of the case, the Andhra Pradesh High Court, in the case of N.T.R. Estate, had occasion to consider the scope of the effect of the three Explanations inserted in section 40(b) by Taxation Laws (Amendment) Act, 1984. In that case the assessments involved were for 1973-74 and 1974-75. The contention of the revenue was that the Explanations had no retrospectivity to govern the assessments earlier to 1-4-1985, but such contention was rejected by the Andhra Pradesh High Court. The Andhra Pradesh High Court held that the effect of Explanations 2 3 was as under : " (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 Its individual capacity and if such partner lends to the partnership monies belonging to the joint family of which he is the 'karta' t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and against the revenue. In the aforesaid judgment of Mangalore Ganesh Beedi Works case the spirit of the judgment of A. P. High Court in N.T.R. Estate's case has been resurrected, so to say. 8. The edifice of revisional order in the impugned case before us stands on two pillars, viz., the capacity in which the partner entered into partnership is immaterial for the purpose of disallowance under section 40(b) and the amendment made by the Taxation Laws (Amendment) Act, 1984, is effective from 1-4-1985 relevant for the assessment year 1985-86 and onwards and not, therefore, applicable to earlier assessment years.The ratio decidendi of Mangalore Ganesh Beedi Works' case has virtually uprooted both the pillars on which the edifice of revisional order stood. However, it is noteworthy that the earlier decision of the Karnataka High Court in the case of Khoday Eswarsa Sons has been judiciously noticed in the later case of Mangalore Ganesh Beedi Works but, yet, it has not been speciflcally overruled because that decision was rendered by a Division Bench of the High Court only and their Lordships have observed that they were having a fresh look at the provisions of section 40(b) after ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... passing the impugned revisional order has not given any finding whatsoever on the contentions made by the assessee one way or the other. In other words, there is no material or evidence on record as regards individual sources of funds or coparcenary source of funds to treat them as separate or distinct so as to decide the question of disallowance of interest paid by the firm to the partners. This aspect has not been considered and gone into by the CIT as he did not consider it necessary in view of the judgment of the Karnataka High Court in the case of Khoday Eswarsa Sons. However, in the light of the later judgment in the case of Mangalore Ganesh Beedi Works it has become all the more necessary to do so. This requires detailed consideration and appreciation of evidence to be adduced by the assessee in this regard. No further evidence has been adduced by the parties before us at the time of hearing either. In these facts and circumstances of the case, therefore, we consider it necessary and proper to restore the matter to the CIT for fresh disposal after considering the evidence, if any, adduced by the assessee in this regard for which the assessee is to be given reasonable oppor ..... X X X X Extracts X X X X X X X X Extracts X X X X
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