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2000 DIGILAW 67 (ALL)

Commercial Motors v. Commissioner of Income-Tax

2000-01-13

M.C.AGARWAL, M.C.JAIN

body2000
Judgment M.C. Agarwal, J. (1) The Income-tax Appellate Tribunal, Delhi Bench "C" Delhi, has referred the following question stated to be of law and to arise out of its order dated 23.11.1979, passed in ITA No. 2156 (Delhi) of 1978-79 for the opinion of this court:- "Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the addition of Rs. 9,616 was rightly made by the Income-tax Officer in determining the total income of the assessee for the assessment year 1975-76?" (2) We have heard Sri Shashi Kant Gupta, learned counsel for the assessee and Sri A.N. Mahajan, learned standing counsel for the Commissioner-respondent. The facts of the case are that the assessee is a partnership firm, while computing its income, the Assessing Officer disallowed Rs. 70,543 in respect of the payment of interest to the partners. This was done in terms of Section 40(b) of the Income-tax Act, 1961 (hereinafter referred to as the Act). The assessee appealed to the Appellate Assistant Commissioner contending that the addition to the extent of Rs. 9,616 was bad. The Appellate Assistant Commissioner accepted the assessee's contention. The Assessing Officer appealed to the Tribunal which reversed the decision following a judgment of this court in Sri Ram Mahadeo Prasad vs. CIT (1953) 24 ITR 176. (3) There were several partners in the firm to whom interest was paid. Interest was also received from some of them. In so far as the partners to whom interest has been paid as well as interest has been received from them, the Tribunal held that only the net interest paid would be added back under Section 40(b) of the Act. The sum of Rs. 9,616 was, however, interest received by the firm on the debit balance of three partners to whom no interest had been paid by the firm. The Tribunal held that the interest received from those three partners could not be adjusted against the interest paid to others and, therefore, the reduction of the disallowance of Rs. 9,616 by the Appellate Assistant Commissioner was wrong. The Tribunal held that the interest received from those three partners could not be adjusted against the interest paid to others and, therefore, the reduction of the disallowance of Rs. 9,616 by the Appellate Assistant Commissioner was wrong. In Sri Ram Mahadeo Prasad vs. CIT (1953) 24 ITR 176 (All), the following question came up for consideration before this court (page 181):- "Whether the excess interest received from the partners of the firm on the amounts overdrawn by them after adjustment against the payments of interest made to them by the firm is taxable income in the hands of the firm?" (4) This court held that the interest received from the partners was the firm's income liable to tax and that a disallowance under Section 10(4)(b) of the Indian Income-tax Act, 1922, of the excess of interest paid to a partner was justified. This view was repeated in Sri flam Mahadeo Prasad vs. CIT (1979) 120 ITR 149 (All). In CIT vs. Kailash Motors (1982) 134 ITR 312 (All) also it was held that only the net amount paid by the firm to a partner after adjusting the interest paid by him to the firm could be disallowed under Section 40(b) of the Act. In CIT vs. Lakshmi Finance and General Trading Co. (1992) 197 ITR 248 also this court repeated the same view following a judgment of the Supreme Court in Keshavji Ravji and Co. vs. CIT (1990) 183 ITR 1. (5) In Keshavji Ravji and Co. vs. CIT (1990) 183 ITR 1 also the Supreme Court held that the interest paid to a partner has to be adjusted against interest received from him and only the excess is to be disallowed under Section 40(b) of the Act. This court's judgment in Sri Ram Mahadeo Prasad vs. CIT (1953) 24 ITR 176 was cited before the Supreme Court and found its approval. The Supreme Court dealt in detail with the various aspects of the matter as contended before it but there is nothing in this judgment which may be contrary to the view taken by this court in the aforesaid case that interest received by a firm from a partner is its income. The Supreme Court dealt in detail with the various aspects of the matter as contended before it but there is nothing in this judgment which may be contrary to the view taken by this court in the aforesaid case that interest received by a firm from a partner is its income. The Supreme Court observed that where two or more transactions on which the interest is paid to, or received from, the partner by the firm are shown to have the element of mutuality and are referable to the funds of the partnership as such, there is no reason why Section 40(b) should be so construed as to exclude in quantifying the interest on the basis of such mutuality and that 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 Section 40(b) of the Act. The Supreme Court has used the word "partner" and not "partners" and there is nothing to show that the concept of mutuality could be extended so as to permit adjustment of interest received from one partner against interest paid to another partner. (6) Learned counsel for the assessee, Sri S.K. Gupta, could not convince us that the concept of mutuality should be expanded to that extent. Therefore, following the aforesaid judgment of this court and the judgment of the Hon'ble Supreme Court in Keshavji Ravji and Co. vs. CIT (1990) 183 ITR 1, we answer the aforesaid question in the affirmative, i.e. against the assessee and in favour of the Commissioner. There will be no order as to costs. An authenticated copy of this judgment be transmitted to the Tribunal in accordance with law.