Suwalal Anandilal Jain v. Commissioner Of Income Tax, Bihar, Ranchi

SUWALAL ANANDILAL JAIN v. COMMISSIONER OF INCOME TAX, BIHAR, RANCHI MARCH 10, 1997 [A.M. AHMADI, CJ., SUJATA V. MANOHAR AND K. VENKATASWAMI, JJ.] Income Tax Act, 1961 : Section 40(b) Explanation 2 (added in 1984). Income Tax---Deduction~AY 1976-77-Assessee-fir.m comprised of C partners in their capacity as Kartas of their respective HUF~Such partners invested their personal funds in the assessee- firm-Held: Interest paid by the Jinn to such partners on deposits made by them in their individual capacity even prior to 1.4.1978 was an allowable deduction by virtue of Expln. 2 to S. 40(b). D The assessee-firm comprised of partners in their capacity as Kartas of their respective HUFs. The said partners had advanced monies to the assessee-firm in their individual capacity. The assessee-firm paid interest to them on the interests made in their respective individual capacity. For the assessment year 1976-77 the assessee-firm claimed that the interest E paid to such partners was an allowable deduction by virtue of Explanation 2 to Section 40(b) of the Income Tax Act, 1961. The Income Tax Officer (ITO) disallowed the claim. The Income Tax Appellate Tribunal confirmed the view taken by the ITO. In view of the divergence of views among the High Courts on the application of S. 40(b) of the Act, issue has been · F referred to this Court, under S. 257 of the Act. Answering the reference in favour of the assessee, this Court HELD : 1. Section 40(b) of the Income Tax Act, 1961 is based upon, and is a recognition of, the basic nature of relationship between a firm and its partners. Explanation 2 to Section 40(b) of the Act is merely declaratory in nature. Accordingly even for the period anterior to 1.4.1985, any interest paid to a partner, who is a partner representing his HUF on the deposit of his personal/individual funds, does not fall within the mischief of Section 40(b) of the Act. [796-D, 797-D] [1997] 2 S.C.R. Brij Mohan Das laxman Das v CIT, JT (1997) 1 SC 155, relied on. Gajanand Poonam Chand & Bros. v. CIT, (1984) 174 ITR346 (Raj.), approved. CIT v. Chidambaram Pillai, (1977) 106 ITR 292, referred to. Makhan Lal Hamarayan v. CIT, Tax Case No. 83- 84of1971 (Pat.), overruled. CIVIL APPELLATE JURISDICTION: Tax Reference Case No. 1 of 1993. From the Order dated 22.9.81 of the Income Tax Appellate Tribunal, Patna in LT.A. No. 871 (Pat.) of 1980. A. Subba Rao for the Applicant. A. Raghuvir, Ms. Lakshmi Iyengar and B.K. Prasad for the Respondent. , The Judgment of the Court was delivered by K. VENKATASWAMI, J. The question that has been referred to this E Court under Section 257 of the Income Tax Act, 1961 (hereinafter called "the Act") reads as follows : ''Whether on the facts and circumstances of the case, the assessee's claim to the benefit of clause (b) of Section 40 of the Income Tax Act, 1961 has been rightly disallowed?". The assessment year in question is 1976-77. The case of the assessee firm was that M/s. Shanti Kumar Jain, Asok Kumar Jain, Raj Kumar Jain and Niranjan were partners in the firm in their capacity as. Karta of respective HUF. They have advanced monies to the assessee firm in their individual capacity. The assessee firm paid interest to them on the invest-G ment 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 HUF as partner in the firm. The sources of the money, according to the assess, are quite separate. The assessee firm claimed that the interest paid H to them shall not be included while computing the mcome chargeable 1997-2-793-797 1 (