JUDGMENT VENKATACHALIAH, J.:—These Special Leave Petitions arise out of and are directed against the orders of the High Court of Judicature at Madras disposing of references made under S. 256(1) of the Income-tax Act 1961 (Act for short) in Tax Cases Nos. 694 of 1982, 565 of 1980, 1404 of 1980, 637 and 638 of 1981, 521 of 1981, 429 of 1983 and 572 of 1983. The High Court following its earlier pronouncement of that Court in Commr. of Income-tax v. O.M.S.S. Sankaralinga Nadar & Co.,(1984) 1471TR332:(1984 Tax LR 89) (Madras) answered the question of law, similar in all the cases, in favour of the revenue. The question was whether in making a disallowance for the interest paid by a partnership firm to a partner under S. 40(b) of the Act the interest, in turn, paid by the partner on his borrowings from the firm should be taken account of and deducted and only the balance disallowed under S. 40(b). On this question, there is a sharp divergence of judicial oinion in the High Courts. In Sri Ram Mahadeo Prasad v. C.I.T. (1953) 24 ITR 176; C.I.T. v. Kailash Motors (1982) 134 ITR 312 (All); C.I.T. v. T.V. Ramanaiah & Sons, (1985) 157 ITR 300; C.I.T.v. Kothari & Co., (1987) 165 ITR 594 (Kant); C.I.T. v. Balaji Commercial Syndicate, (1987) 165 ITR 596 (Kant); C.I.T. v. Motilal Ramjiwan and Co., (1988) 171 ITR 294 (Raj); C.I.T. v. Precision Steel and Engg. Works, (1989) 179 ITR, the High Courts have taken the view 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. However, in C.I.T. v. O.M.S.S. Sankaralinga Nadar & Co., (1984) 147 ITR 332: (1984 Tax I.R 89), the High Court of Madras has taken a contrary view. 2. We have heard Sri Ramachandran, learned senior counsel for the appellants and Sri Manchanda, learned Senior Counsel and Sri S.B. Ahuja for the revenue. Special Leave is granted. The appeals are taken up for final hearing, heard and are disposed of by this common judgment. 3. We may refer to the facts in SLP(C) No. 14291/1985 which is representative of and typifies the context in which the question arises. The appellant, M/ s. Kestavji Ravji & Co. Special Leave is granted. The appeals are taken up for final hearing, heard and are disposed of by this common judgment. 3. We may refer to the facts in SLP(C) No. 14291/1985 which is representative of and typifies the context in which the question arises. The appellant, M/ s. Kestavji Ravji & Co. is a registered-firm consisting of 6 partners and carries on a business in tile manufacture of and export of stainless steel articles. In the accounting year ended 13-11-1974, corresponding to the assessment year 1975-76, the firm paid interest to the partners on the amounts standing to their respective credits in the firm. The firm also received from the partners interest on their borrowings from the firm. For the relevant assessment year, the appellant filed a return disclosing a total income of Rs. 2,55,225. The Income-tax Officer while disallowing the amount of interest paid to partners did not set-off the interests received from the partners on their own borrowings. With this disallowance, the income of the firm was assessed at Rs. 2,79,730. In the assessees appeal, the Appellate Assistant Commissioner of Income-tax by his order dated 18-10-1977 allowed the claim of the appellant that only the net interest paid to the partners, after setting-off the interest received from them was to be disallowed. The Revenue took up the matter in further appeal before the Income-tax Appellate Tribunal which by its order dated 6-1-1979 dismissed the appeal and affirmed the appellate order of the Assistant Commissioner. The Tribunal, as did the Appellate Assistant Commissioner, placed reliance on the decision of the Allahabad High Court in SriRam Mahadeo Prasad v.C.I.T. (1953) 24 ITR 176.. At the instance of the revenue the Tribunal stated a case and referred the following question of law for the opinion of the High Court. "Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was correct in holding that net interest should be disallowed under S. 40(b) of the Income tax Act, 1961?" This reference under S. 256(1) of the Act was registered in the High Court as Tax Case No. 694/ 82 and the High Court by its order dated 5-3-1985 answered the question in the negative and against the appellant relying, as stated earlier,on its earlier pronouncement in Sankaralinga Nadars case (1984 Tax LR 89) (Madras). Broadly, similar are the circumstances under which the other appeals arise. 4. Broadly, similar are the circumstances under which the other appeals arise. 4. Before we advert to and evaluate the merits of the contentions, it is appropriate to refer to the statutory provision as it then stood. Section 40 of the Act provided. "40. "Notwithstanding anything to the contrary in sections 30 to 39, the following amounts shall not be deducted in computing the income chargeable under the head "profits and gains of business or profession". (a) (i) to (v) Omitted as unnecessary. (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." (c) & (d) Omitted as unnecessary. By the Taxation Laws (Amendment) Act, 1984, several amendments were introduced in the body of S. 40. One of them was the introduction of Explanation I in cl. (b) of S.40. That Explanation reads: "Explanation 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." Referring to the new Explanation inserted in clause (b) of S. 40 by the amendment, the "Notes on Clauses" say: "This clause seeks to insert three new Explanations to S. 40(b) of the Act. Explanation I seeks to provide that where interest is paid by a firm to a partner who has also paid interest to the firm, the amount of interest to be disallowed under S. 40(b) of the Act Shall be limited to the net amount of interest paid by the firm to the partner, that is, 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." "The proposed amendments will take, effect from 1st April, 1985, and will, accordingly, apply in relation to the assessment year 1985-86 and subsequent years." The Explanation I, which was introduced in 1984, proprio vigore does not apply to the assessment relating, as here, to an earlier year. Whether the Explanation brings about a change in, or admits of being understood as an exposition of, the law is, however, a different matter. Whether the Explanation brings about a change in, or admits of being understood as an exposition of, the law is, however, a different matter. It is, perhaps, also appropriate here to refer to the circular No. 33-D (XXV-24) of 1965 of the Central Board of Direct Taxes, the operative part of which provides : "However where a firm pays interest to as well as receives interest from the same partner, only the net interest can be stated to have been received or paid by the firm, as the case may be, and only the net interest should be taken into consideration. This view also finds support in the decision of the Allahabad High Court in the case of Sri Ram Mahadeo Prasad (1953) 24 ITR 176. In view of the above, the instructions contained in Boards Circular No. 55 of 1941 may be treated as modified accordingIy.............". 5. Section 40 imposes a restriction on the deductibility of certain outgoings and expenses which are, otherwise, enabled under Ss. 30-39 of the Act and constitutes an exception to these sections, Clause (h) of S. 40 is analogous, with some enlargement, to S. 10(4)(b) of the predecessor Act of 1922. The prohibition in S. 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 Sankaralinga Nadars case (1984 tax LR 89) and emphasised by the learned counsel for the The reasonings of the Madras High Court in that case and of the Andhra Pradesh High Court in Commr. of Income-tax v. T. V. Ramanaiah & Sons, (1985) 157 ITR 300 illustrate the rival points of view. The Madras High Court held: "........ The collocation of the words shows that what is disallowed in the matter of payment of interest cannot be the net interest, but can only be interest paid with reference to a given account relating to payment of interest by the firm to the partner. This is because the subject of disallowance in the matter of payment of interest appears in S. 40(b) cheek by. jowl with salary, bonus, commission or remunereration made by the firm to the partners. There cannot be any net salary or net bonus or net remuneration as matters of disallowance. This is because the subject of disallowance in the matter of payment of interest appears in S. 40(b) cheek by. jowl with salary, bonus, commission or remunereration made by the firm to the partners. There cannot be any net salary or net bonus or net remuneration as matters of disallowance. They can only be salary, as such, or bonus, as such, or commission, as such, or remuneration as such which are the subject of disallowance. In like manner, when the section speaks of payment of interest by the firm to a partner as the subject of disallowance, it can only be payment of gross interest in the particular account in which interest is payable . Salary, bonus, commission or remuneration do not have what may be characterised as a two-way traffic "...........In the earliest of the cases, the Allahabad High Court endorsed the Tribunals decision to disallow only the net interest. The court did so, not on a construction of the words of the section, but on equitable grounds of "fairness"......... (p. 336) (of 147 ITR 332). The Andhra Pradesh lligh Court, however, taking the contrary view relied on, what it considered, the revenues own understandiig of the legal position as made manifest in the Boards circular that the "real purpose of S. 40(b) of the Act was to add back only the net amount of interest and not the gross amount". On the interpretation of S. 40(b), the High Court in Ramanaiahs case said: "............. As a matter of interpretation of S . 40(b) of the Act, we find that there is nothing in the provision which expressly states that the amount to be added back is either gross or not. The provision requires that "any payment of interest" by a partnership firm to a partner shall not be deducted in computing the income of the partnership firm. For the purpose of finding out the amount paid by way of interest, it is necessary for the Income-tax Officer to find out the amount of interest paid by the partnership firm to the partner and also see if the same partner paid any interest to the partnership firm and ascertain the amount of interest effectively paid by the partnership firm to the partner.............." (1985) 157 ITR 300 at p. 304. 5A. The arguments of the learned counsel on both sides covered a wide range of contention. 5A. The arguments of the learned counsel on both sides covered a wide range of contention. The submissions of Sri Ramachandran in support of the appeals admit of being formulated thus: (a) The scheme of S. 40 of the Act does not evince any intention to penalise a firm for the outgoings which are rendered non-deductible; but the sole object of S. 40(b) is, having regard to the special features and legal, incidents of a partnership, to enable the assessment of the real-income of the firm. The outgoings disallowed by S. 4(Y(b) are not really outgoings at all, but constitute what are, otherwise, ingredients or components of the real income of the firm. Therefore, the ascertainment of the real income or the real commercial profits does not require or compel the exclusion of the cross-interest paid by a partner in determining the quantum to be disallowed under S. 40(b). (b) The extent of the embargo under S. 10(4)(b) of the 1922 Act on the disallowance of "Interest" paid to a partner was judicially interpreted and ascertained in Sri Ram Mahadeo Prasad v. Commr. of Incometax, (1953) 24 ITR 176 and when the legislature re-enacted those provisions in S. 40(b) of the 1961 Act in substantially the same terms, legislature must be held to have used that expression with the same implications attributed to it by the earlier judicial exposition. (c) Interest payable by the partners to the firm pursuant to an agreement between the partners is of the same nature as that payable be the firm to the partners on the capital, brought in by them. Interest paid to and received from a partner are both integral parts of a method adopted by the partners for adjusting the division of profits and in that sense both payments partake of the same character. In identifying and quantifying the interest for purposes of S. 40(b) it would be permissible to take both the payments into consideration and treat only such excess, if any, paid by the firm as susceptible to the exclusionary rule in S. 40(b). (d) The circular No. 33-D(XXV 24) of 1965 of the Central Board of Direct Taxes, which is statutory in character, is binding on the authorities. The High Court was in error in taking a view of the legal position different from the one indicated in it. (d) The circular No. 33-D(XXV 24) of 1965 of the Central Board of Direct Taxes, which is statutory in character, is binding on the authorities. The High Court was in error in taking a view of the legal position different from the one indicated in it. (e) The amendment of 1984 inserting Explanation I in S. 40(b), though later in point of time, constitutes a legislative exposition of the correct import of the provision and so construed offers a guide to the correct understanding of the provisions in S. 40(b) in its application to the earlier years as well. 6. Re: Contention (a) The premise of the argument is good. in parts; but the inference does not logically follow. S. 40(b), it is true, seeks to prevent the, evasion of tax by diversion of the profits of a firm; but the legislative expedience adopted to achieve that objective requires to be given effect on its own language. Section 40 opens with the non obstante clause and directs that certain outgoings specifically enumerated in it "shall not be deducted" in computing the income chargeable under the head "profits and gains of business or professions". As long as there is no ambiguity in the statutory language, resort to any interpretative process to unfold the legislative intent becomes impermissible. The supposed intention of the legislature cannot then be appealed to whittle down the statutory language which is otherwise unambiguous. If the intendment is not in the words used it is nowhere else. The need for interpretation arises when the words used in the statute are, on their own terms, ambivalent and do not manifest the intention of the Legislature. In Doypack Systems Pvt. Ltd. V. Union of lndia, (1988)2 SCC 299 it was observed: "The words in the statute must, prima facie, be given their ordinary meanings. Where the grammatical construction is clear and manifest and without doubt, that construction ought to prevail unless there are some strong and obvious reasons to the contrary ......" (p. 331) (of SCC). "It has to be reiterated that the object of interpretation of a statute is to discover the intention of the Parliament as expressed in the Act. The dominant purpose in construing a statute is to ascertain the intention of the legislature as expressed in the statute, considering it as a whole and in its context. "It has to be reiterated that the object of interpretation of a statute is to discover the intention of the Parliament as expressed in the Act. The dominant purpose in construing a statute is to ascertain the intention of the legislature as expressed in the statute, considering it as a whole and in its context. That intention, and therefore the meaning of the statute, is primarily to be sought in the words used in the statute itself, which must, if they are plain and unambiguous, be applied as they stand ........." (p. 332) (of SCC). (Emphasis supplied). Artificial and unduly latitudinarian rules of construction which, with their general tendency to give the tax-payer the breaks", are out of place where the legislation has a fiscal mission. Indeed, taxation has ceased to be regarded as an "impertinent intrusion into the sacred rights of private property" and it is now increasingly regarded as a potent fiscal tool of State policy to strike the required balance -- required in the context of the felt needs of the times -- between citizens" claim to enjoyment of his property on the one hand and the need for an equitable distribution of the burdens of the community to sustain social services and purposes on the other. These words of Thomas M. Cooley in Law of Taxation Vol. 2 are worth mentioning: "Artificial rules of construction have probably found more favour with the courts than they have ever deserved. Their application in legal controversies has often times been pushed to an extreme which has defeated the plain and manifest purpose in enacting the laws. Penal laws have sometimes had all their meaning construed away and in remedial laws, remedies have been found which the legislature never intended to give. Something akin to this has befallen the revenue laws..........." (Emphasis supplied). There are, indeed, strong and compelling, considerations against the adoption of the test suggested by Sri Ramachandran. Limiting of the ambit of S. 40(b) on the supposed real incometest would, perhaps, lead to positions and results, whose dimensions and implications are not, to say the least, fully explored. Something akin to this has befallen the revenue laws..........." (Emphasis supplied). There are, indeed, strong and compelling, considerations against the adoption of the test suggested by Sri Ramachandran. Limiting of the ambit of S. 40(b) on the supposed real incometest would, perhaps, lead to positions and results, whose dimensions and implications are not, to say the least, fully explored. The test suggested by Sri Ramachandran, might on its own extended logic, validate a set-off of the interest paid to one partner against interest received from another and likewise, interest received from one partner on some other dealings between him and the firm against interest paid to another partner on his or her capital contribution. The test of real incomeas one on which the operation of S. 40(b) could be sought to be limited is not a reliable one. Indeed, the following observations of this court on the concept of real incomein State Bank of Travancore v. C.I.T. (1986) 158 ITR 102 at p. 155, though made in a different context, are apposite: "........The concept of real income is certainly applicable in judging whether there has been income or not but, in every case, it must be applied with care and within well recognised limits. We were invited to abandon legal fundamentalism. With a problem like the present one, it is better to adhere to the basic fundamentals of the law with clarity and consistency than to be carried away by common clinches. The concept of real income certainly is a well-accepted one and must be applied in appropriate cases but with circumspection and must not be called in aid to defeat the fundamental principles of the law of Incometax as developed". This contention of Sri Ramachandran rests on generalisations which incur the criticism of being too broad and have certain limitations of their own. Contention (a) does not advance appellants case. 7. Re: Contention (b) The submissions of Sri Ramachandran on the point are that where the meaning of a word used in a statute had been judicially ascertained by a court and where the legislature, while re-enacting the law on the subject, uses the same word, it must be taken to have been aware of the meaning so judicially ascertained earlier and not to have used the word with a different content. This is, no doubt, a well recognised guide to construction. This is, no doubt, a well recognised guide to construction. When words acquire a particular meaning or sens.e because of their authoritative construction by superior courts, they are presumed to have been used in the same sense when used in a subsequent legislation in the same or similar context. This principle was stated by the judicial committee in H. H. Ruckmaboye v. Lulloobhoy Mottichund (1851-54) 5 Moo Ind App 234 at 250 thus: ".......it is, therefore, of considerable importance to ascertain what has been deemed to be the legal import and meaning of them, because, if it shall appear that they have long been used, in a sense which may not improperly be called technical, and have been judicially construed to have a certain meaning, and have been adopted by the Legislature in that sense, long prior to the Statute 21 James I., C. 16, the rule of construction of Statutes will require, that the words in the Statute should be construed according to the sense in which they had been so previously used, although that sense may vary from the strict literal meaning of them." This principle has been reiterated by this Court in several pronouncements. But the limitations of its application in the present cases arise out of the circumstance that the decision of the Allahabad High Court in Sri Ram Mahadeo Prasad v. C.I.T., (1953) 24 ITR 176 did not proceed or rest on any special or technical connotation of the word "interest" nor any special legal sense which that word could be said to have acquired by the earlier judicial ascertainment of its amplitude. The decision proceeded on a construction of the relevant provision i.e. Section 10(4)(b) of the 1922 Act and on what the High Court considered as affording to the assessee a fair treatment. Nothing particular stemmed from the interpretation of the expression "interest". The appeal to this principle of construction is, in our opinion, somewhat out of place in this case. The rules of interpretation are not rules of law; they are mere aids to construction and constitute some broad pointers. The interpretative criteria apposite in a given situation may, by themselves, be mutually irreconcilable. It is the task of the court to decide which one, in the light to all relevant circumstances, ought to prevail. The rules of interpretation are useful servants but quite often tend to become difficult masters. The interpretative criteria apposite in a given situation may, by themselves, be mutually irreconcilable. It is the task of the court to decide which one, in the light to all relevant circumstances, ought to prevail. The rules of interpretation are useful servants but quite often tend to become difficult masters. It is appropriate to recall the words of Lord Reid in Maunsell v. Olins, (1975) 1 All ER 16. "Then rules of construction are relied on. They are not rules in the ordinary sense of having some binding force. They are our servants not our masters. They are aids to construction, presumptions or pointers. Not infrequently one rule points in one direction, another in a different direction. In each case we must look at all relevant circusmtances and decide as a matter of judgment what weight to-attach to any particular rule." This passage was referred to with approval by this Court in Utkal Contractors and Joinery v. State of Orissa, (1987) 3 SCR 317 at p. 330 Contention (b) is, therefore, not of any assistance to the appellants. 8. Re : Contention (c) There are certain aspects of the legal relationship amongst partners which do impart a special complexion to the question under consideration. The point raised in these appeals is confined to a situation where a partner receives interest on the Capital subscribed by him and the same partner pays interest on the drawings made by him. A firm under the general law is not a distinct legal entity and has no legal existence of its own. The partnership property vests in all the partners and in that sense every partner has an interest in assets of the partnership. However, during the subsistence of the partnership no partner can deal with any portion of the property as his own. In Narayanappa v. Krishnappa, (1966) 3 SCR 400 , this Court referred to the nature of the interest of a partner in the firm and observed (at p. 1304 of AIR): "................ The whole concept of partnership is to embark upon a joint venture and for that purpose to bring in as capital money or even property including immovable property. Once that is done whatever is brought in would cease to be the exclusive property of the person who brought it in. The whole concept of partnership is to embark upon a joint venture and for that purpose to bring in as capital money or even property including immovable property. Once that is done whatever is brought in would cease to be the exclusive property of the person who brought it in. It would be the trading asset of the partnership in which all the partners would have interest in proportion to their share in the joint venture of the business of the partnership. The person who brought it in would, therefore, not be able to claim or exercise any exclusive right over any property which he has brought in, much less over any other partnership property. He would not be also to exercise his right even to the extent of his share in the business of the partnership.............." In CIT v. Chidambaram, (1977) 106 ITR 292 at pp. 295 & 296 this Court observed: "Here the first thing that we must grasp is that a firm is not a legal person even though it has some attributes of personality. Partnership is a certain relation between persons, the product of agreement to share the profits of a business. Firm is a collective noun, a compendious expression to designate an entity, not a person. In income-tax law, a firm is a unit of assessment, by special provisions, but is not a full person which leads to the next step that since a contract of employment requires two distinct persons viz. the employer and the employee, there cannot be a contract of service, in strict law, between a firm and one of its partners. So that any agreement for remuneration of, a partner for taking part in the conduct of the business must be regarded if the profits being made over as a reward for the human capital brought in. section 13 of the partnership Act brings into focus this basis of partnership business." "........... It is implicit that the share income of the partner takes in his salary. The telling test is that where a firm suffers loss, the salaried partners share in it goes to depress his share of income. Surely, therefore, salary is a different label for profits, in the context of a partners remuneration". It is implicit that the share income of the partner takes in his salary. The telling test is that where a firm suffers loss, the salaried partners share in it goes to depress his share of income. Surely, therefore, salary is a different label for profits, in the context of a partners remuneration". (Underlining supplied) In Lindley on Partnership (14th Edn.), we find this statement of the law: "...........In point of law, a partner may be the debtor or the creditor of his copartners. but he cannot be either debtor or creditor of the firm of which he is himself a member, nor can he be employed by his firm, for a man cannot be his own employer." (p. 30) The position as stated above was approved by this, Court in Chidambarams case ( AIR 1977 SC 489 ). In Regional Director Employees State Insurance Corporation, Trichur v. Ramanuja Watch Industries (1985) 2 SCR 119 this Court dealing with the question whether there could be a relationship of master and servant between a firm on the one hand and its partners on the other, indicated that under the law of partnership there can be no such relationship as it would lead to the anomalous position of the same person being both the master and the servant. The following observations of Justice Mathew in Ellis v. Joseph Ellis & Co. (1905) 1 KB 324 were referred to with approval: "The argument on behalf of the applicant in this appeal appears to involve a legal impossibility, namely, that the same person can occupy the position of being both master and servant, employer and employed." (P. 126 of SCR): (,at p. 281 of AIR) And observed: "................ A partnership firm is not a legal entity. This Court in, Champaran Cane Concern v. State of Bihar ( AIR 1963 SC 1737 )., pointed out that in a partnership each partner acts as an agent of the other. A partnership firm is not a legal entity. This Court in, Champaran Cane Concern v. State of Bihar ( AIR 1963 SC 1737 )., pointed out that in a partnership each partner acts as an agent of the other. The position of a partner qua the firm is thus not that of a master and a servant or employee which concept involves an element of subordination but that of equality, The partnership business belongs to the partners and each one of them is an owner thereof............" (P. 123 of SCR) "It is thus clear that in the United States, Great Britain and Australia, a partner is not treated as an employee of his firm merely because he receives a wage or remuneration for work done for the firm. This view is in complete accord with the jurisprudential approach. In the absence of any statutory mandate, we do not think there is any scope for accepting the view of the Rajasthan High Court." (P. 127 of SCR) 9. Sri Ramachandrans contention is that both the capital brought-in by the partners to the firm and the amounts that may be drawn by them by the partnership firm partake of the same nature and character as the funds of the partnership. This may be so. But in effectuating the consequences of the recognition of this position, it is necessary to ensure that express provisions of the statute departing from general law are not whittled down. To the extent that the statute expressly or by necessary implication departs from the general law, the latter cannot be invoked to displace the effect of the statute. But, if there is no such statutory departure the general principles operating in. that branch of the law determine the nature of the legal relationship. To the extent that the statute expressly or by necessary implication departs from the general law, the latter cannot be invoked to displace the effect of the statute. But, if there is no such statutory departure the general principles operating in. that branch of the law determine the nature of the legal relationship. Sir Francis Bennion in his Statutory Interpretation observes: "Unless the contrary intention appears, an enactment by implication imports any prirlciples or rule of law (whether statutory or non-statutory) which prevails in the territory to which the enactment extends and is relevant to its operation in that territory." (p. 350) "Unless the contrary intention appears, an enactment by implication imports the principle of any legal maxim which prevails in the territory to which the enactment extends and is relevant to the operation of the enactmentin that territory." (p. 354) What follows is that, to the extent not prohibited by the statute, the incidents of the general law of partners are attracted to ascertain the legal nature and character of a transaction. This is quite apart from distinguishing the substance of the transaction from its form. In Sargaison v. Roberts (1969) 45 Tax Cas 612 at 617 & 618 Megarry J. observed: "I appreciate that what I have to do is to construe the words used, and not to insert words which are not there, or to resort to a so-called "equitable construction" of a taxing statute. But even when I have given full weight to this consideration, I think that I am entitled to distinguish between the substance of a transaction and the machinery used to carry it through............" "...............Substance" and "form" are words which must no doubt be applied with caution in the field of statutory construction. Nevertheless, where the technicalities of English conveyancing and land law are brought into juxtaposition with a United Kingdom taxing Statute, I am encouraged to look at the realities at the expense of the technicalities........." In Commr. of Income-tax v. Gullanders Arbuthnot & Co. (1973) 87 ITR 407 at 418, this Court said: ".............The taxing authority is entitled and is indeed bound to determine the true legal relation resulting from a transaction. If the parties have chosen to conceal by a device the legal relation, it is open to the taxing authority to unravel the device and to determine the true character of the relationship. If the parties have chosen to conceal by a device the legal relation, it is open to the taxing authority to unravel the device and to determine the true character of the relationship. But the, legal effect of a transaction cannot be displaced by probing into the substance of the transaction........." (Emphasis supplied) The Court is not precluded from treating what the transaction is in point of fact as one in point of law also. 10. How do these principles operate on the present controversy? It appears to us that if in substance interest paid by the firm to a partner and the interest; in turn, received from the partner are mere expressions of the applications of the funds or profits of the partnership and which, having regard to the community of interest of the partners, are a mere variations of the method of adjustment of the profits, there should be no impediment in treating them as part of the same transaction if, otherwise in general law they admit of being so treated. The provisions of S. 40(b) do not exclude or prohibit such an approach. If instead of the transactions being reflected in two separate or distinct accounts in the books of the partnership they were in one account, the quantum of interest paid by the firm to the partner would, to the extent of the drawings of the partner, stand attenuated. The mere fact that the transactions are split into or spread over to two or more accounts should not by itself make any difference if, otherwise, the substance of the transaction is the same. One of the relevant tests would be whether the funds on which interest is paid or received partake of the same character. A broad anology, though in itself may not be conclusive, is furnished by the idea of "mutual-dealings" and the principle of set-off statutorily recognised in bankruptcy proceedings under S. 46 of the Provincial Insolvency Act and attracted also to. proceedings for winding-up of companies by virtue of S..529 of the Companies Act, 1956, where the mutual-credit clause steps in to avoid the injustice, which would otherwise, arise of compelling a creditor to pay the official-assignee the full amount of the debt due from him to the insolvent, while the creditor would, perhaps, only receive a small dividend on the debt due from the insolvent to him under a pari passu payment. This principle was recognised by this Court in Official Liquidator v. Lakshmikutty, (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 set-off 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 conclusions. 11. The decision of the Madras High Court in Sankaralinga Nadars case (1984 Tax LR 89) speaks of income-tax and equity being strangers. To say that a Court could not resort to the so-called "equitable construction" of a taxing statute is not to say that where a strict literal construction leads to a result not intended to subserve the object of the legislation, another construction, permissible in the context, should not be adopted. In Commr. of Income-tax v. J. H. Gotla, (1985) 156 ITR 323, this Court said "......... we should find out the intention from the language used by the Legislature and if strict literal construction leads to an absurd result, i.e., a result not intended to be subserved by the object of the legislation found in the manner indicated before, then if another construction is possible apart from strict literal construction, then that construction should be preferred to the strict literal construction. Though equity and taxation are often strangers, attempts should be made that these do not remain always so and if a construction results in equity rather than in injustice, then such construction should be preferred to the literal construction. Furthermore, in the instant case, we are dealing with an artificial liability created for counteracting the effect only of attempts by the assessee to reduce tax liability by transfer (pp. Furthermore, in the instant case, we are dealing with an artificial liability created for counteracting the effect only of attempts by the assessee to reduce tax liability by transfer (pp. 339-40) (of ITR): (at p. 1709 of AIR) In this respect taxing statutes are not different from other statutes. In A-G v. Carlton Bank (1899) 2 QB 158 Lord Russel of Killowen, C. J, said: "I see no reason why any special canons of construction should be applied to any Act of Parliament. and I know of no authority for saying that a taxing Act is to be construed differently from any other Act. The duty of the court is, in my opinion, in all cases the same, whether the Act to be construed relates to taxation or any other subject, viz. to give effect to the intention of the legislature ............" 12. We, accordingly, accept the submission of Sri Ramachandran on this point. In our opinion, where two or more transactions on which interest is paid to or received from the partner by the firm are shown to have the element of mutuality and are refereable to the funds of the partnership as such, there is no reason why S. 40(b) should be so construed as to exclude in quantifying thd interest on the basis of such mutuality. In such circumstances the interest, if any, paid to a partner by the firm in excess of what is received from the partner could alone be excluded from deduction under S. 40(b). Contention c is held and answered accordingly. 13. Re : Contention (d) Sri Ramachandran contended that circular of 1965 of the Central Board of Direct Taxes was binding on the authorities under the Act and should have been relied upon by the High Court in support of the Courts construction of S. 40(b) to accord with the understanding of the provision made manifest in the circular. This contention and the proposition on which it rests, namely, that all circulars issued by the Board have a binding legal quality incurs, quite obviously, the criticism of being too broadly stated. The Board cannot preempt a judicial interpretation of the scope and ambit of a provision of the Act by issuing circulars on the subject. This is too obvious a proposition to require any argument for it. The Board cannot preempt a judicial interpretation of the scope and ambit of a provision of the Act by issuing circulars on the subject. This is too obvious a proposition to require any argument for it. A circular cannot even impose on the tax payer a burden higher than what the Act itself on a true interpretation envisages. The task of interpretation of the laws is the exclusive domain of the courts. However, this is what Sri Ramachandran really has in mind circulars beneficial to the assessees and which tone down the rigour of the law issued in exercise of the statutory power under S. 119 of the Act or under corresponding provisions of the predecessor Act are binding on the authorities in the administration of the Act. The Tribunal, much less the High Court, is an authority under the Act. The circulars do not bind them. But the benefits of such circulars to the assessees have been held to be permissible even though the circulars might have departed from the strict tenor of the statutory provision and mitigated the rigour of the law. But that is not the same thing as saying that such circulars would either have a binding effect in the interpretation of the provision itself or that the Tribunal and the High Court are supposed to interpret the law in the light of the circular. There is, however, support of certain judicial observations for the view that such circulars constitute external aids to construction. In State Bank of Travancore v. C. I. T., (1986) 158 ITR, however, this Court referring to certain circulars of the Board said: "............The earlier circulars being executive in character cannot alter the provisions of th Act. These were in the nature of concessions and could always be prospectively withdrawn. However, on what lines the rights of the parties should be adjusted in consonance with justice in view of these circulars is not a subject-matter to be adjudicated by us and, as rightly contended by counsel for the Revenue, the circulars cannot detract from the Act." (Emphasis supplied) (p.139) (of ITR) The expression executive in character is, presumably, used to distinguish them from judicial pronouncement. The circulars referred to in that case were also of the Central Board of Direct Taxes and were, presumably also, statutory in character. The circulars referred to in that case were also of the Central Board of Direct Taxes and were, presumably also, statutory in character. However, this contention need hot detain us, as it is unnecessary to examine whether or not such circulars are recognised, legitimate aids to statutory construction. In the present case, the circular of 1965 broadly accords with the view taken by us on the true scope and interpretation of S. 40(b) in so far as the quantification of the interest for purposes of S. 40(b). Contention (d) is disposed of accordingly. 14. Re: Contention (e) Sri Rainachandran urged that the introduction, in the year 1984, of Explanation I to S. 40(b) was not to effect or bring about any change in the law, but was intended to be a mere legislative exposition of what the law has always been. An Explanation, generally speaking, is intended to explain the meaning of certain phrases and expressions contained in a statutory provision. There is no general theory as to the effect and intendment of an Explanation except that the purposes and intendment of the Explanation are determined by its own words. An Explanation, depending on its language, might supply or take away something from the contents of a provision. It is also true that an Explanation may - this is what Sri Ramachandran suggests in this case - be introduced by way of abundant caution in order to clear any mental cobwebs surrounding the meaning of a statutory provision spun by interpretative errors and to place what the legislature considers to be the true meaning beyond controversy or doubt. Hypothetically, such can be the possible purpose of an Explanationcannot be doubted. But the question is whether in the present case, Explanation I inserted into S. 40(b) in the year 1984 has had that effect. 15. The notes on clauses appended to the Taxation Laws (Amendment) Bill, 1984, say that Clause l0 Which seeks to amend S .40 will take effect. from 1st April, 1985 and will accordingly, apply in relation to the assessment year 1985-86 and subsequent years. The express prospective operation and effectuation of the Explanation might, perhaps, be factor necessarily detracting from any evincement of the intent on the part of the legislature that the Explanation was intended more as a legislative-exposition or clarification of the existing law than as a change in the law as it then obtained. The express prospective operation and effectuation of the Explanation might, perhaps, be factor necessarily detracting from any evincement of the intent on the part of the legislature that the Explanation was intended more as a legislative-exposition or clarification of the existing law than as a change in the law as it then obtained. In view of what we have said on point (c) it appears unnecessary to examine this contention any further. Contention (e) is disposed of accordingly. 16. In the result, for the foregoing reasons these appeals are allowed; the orders of the High Court under appeal set aside and the, question of law referred for opinion is answered in the affirmative in terms of para 12 (supra). In the circumstances, there will be no orders as to the costs in these appeals. Appeal allowed. For Citation : AIR 1991 SC 1806