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Hindustan Steel Forgings v/s Commissioner Of Income-Tax

    Decided On, 02 March 1989

    At, High Court of Punjab and Haryana

    By, THE HONOURABLE MR. JUSTICE GOKAL CHAND MITAL & THE HONOURABLE MR. JUSTICE S.S. SODHI

    For the Appearing Parties: Ajay Mittal, Ashok Bhan, B.S. Gupta, Sanjay Bansal, Advocates.



Judgment Text

(1.) CHIRANJI Lal, Mangat Rai and Jiwan were partners of Hindustan Steel Forgoings, Rajpura, the assessee, in their capacity as kartas of their respective Hindu undivided families. They had their personal accounts with the assessee in which they had advanced money in their individual capacity and during the accounting period relevant to the assessment year 1978-79, the assessee paid interest to them on their individual accounts totalling Rs. 12,840. Before the Income-tax Officer, the assessee claimed deduction of the interest paid but the Income-tax Officer disallowed the same on the ground that it was hit by the provisions of Section 40 (b) of the Income-tax Act, 1961 (hereinafter called "the Act"), because the representative capacity of the partners could not be taken note of and the interest paid would be considered as having been paid to the partners, The Appellate Assistant Commissioner agreed with the Income-tax Officer and so also the Tribunal. On the aforesaid facts, the Income-tax Appellate Tribunal, Chandigarh, has referred the following question for our opinion.

"whether, on the facts and circumstances of the case, the Tribunal erred in law in disallowing under Section 40 (b) of the Income-tax Act, 1961, interest aggregating to Rs. 12,840 paid by the firm to the three individuals who were partners on behalf of their Hindu undivided families as kartas, on their deposits ?"

(2.) SECTION 40 (b) of the Act, as it stood in the assessment year, was interpreted by different High Courts on similar facts and there were divergent opinions. By the insertion of the Explanations to the provisions by the Taxation Laws (Amendment) Act, 1984, which came into force with effect from April 1, 1985, and as a result of Explanation 2, Clause (i), it was provided that interest paid by the firm to an individual or by an individual to the firm otherwise than as a partner in a representative capacity, shall not be taken into account for the purposes of Clause (b). It is undisputed that if, after April 1, 1985, the interest is paid by an assessee-firm to an individual who is a partner in the assessee-firm as karta of his Hindu undivided family, then Section 40 (b) would not apply and the assessee-firm would be entitled to claim deduction under Section 37 of the Act. The aforesaid amendment was taken notice of by the Central Board of Direct Taxes and it issued a circular which is also found printed in the Statutes Section of [1984] 149 ITR 127. Under the heading "reducing litigation", para 2 and its sub-para (b) are relevant for reproduction :

"2. A number of amendments have been made to bring out the legislative intention more clearly so that further controversy and litigation regarding the true intent and purport of these provisions is avoided. To illustrate :. . . (b) It has also been clarified that where a person is a partner in his representative capacity, interest paid to him in his individual capacity will not be disallowed under the above mentioned provisions and vice versa. "

(3.) IT is not disputed, in view of the authoritative decision of the Supreme Court, that such like circulars are binding on the Department and the assessees are entitled to take the benefit of the same. A reading of para 2 shows that by the amendment, the Legislature intended to state the law more clearly (underlined* to put emphasis) so that further controversy and litigation regarding the true intent and purport (underlined* to put emphasis) of these provisions is avoided. To illustrate the meaning of para 2, three illustrations were added and the illustration relevant for us, is illustration (b). A reading of the same shows that the amendment has clarified that where a person is a partner in his representative capacity, interest paid to him in his individual capacity will not be disallowed under the abovementioned provisions and vice versa. Therefore, it is clear that the amendment brought in by the Amendment Act, 1984, was only clarificatory with a view to explain what wa s hidden so as to make it apparent to the naked eye. Such an amendment is always considered retrospective so that what looked hidden hitherto before should be considered as apparent and if that is so, the clarification which has been brought about by the amendment should be read as if the unamended provision was also to be read in the same way and if that is so, the rulings which interpreted Section 40 (b) before the amendment to mean that the position of an individual in his individual capacity and that individual representing a Hindu undivided family as a karta, were two separate known legal entities for the purpose of the income-tax law as also for the purpose of "person" as defined in Section 2 (31) of the Act. Even in the definition of "person", Hindu undivided family is a distinct entity as compared to an individual. By the amendment and particularly in view of the circular issued by the Central Board of Direct Taxes, [1984] 149 ITR (St.) 127, the decisions of the High Courts, which are in consonance with the amended provision, were accepted so that the provision, as it existed before the amendment, was to be read in the light of the amended provision. Similar view has been taken by a Full Bench of the Madhya Pradesh High Court in CIT v. Narbharam Popat-bhai and Sons [1987] 166 ITR 534, and we fully agree with the same.

(4.) A Full Bench of the Gujarat High Court in Chhotalal and Co. v. CIT [ 1984] 150 ITR 276, has also taken the same view without the aid of the circular issued by the Central Board of Direct Taxes. Decisions of High Courts of Andhra Pradesh, Bombay, Madras and Rajasthan, were also cited before us, taking the same view as that of the Full Bench of the Gujarat High Court and since all the aforesaid decisions are mentioned in the Full Bench decision of the Madhya Pradesh High Court, we are not discussing them in detail and following all these judgments which are in line with our thinking, we disagree with the view taken to the contrary by the Allahabad High Court in its majority decision in CIT v. Nitro Phosphetic Fertilizer [1988] 174 ITR 269 [fb], but rather approve the minority decision. We also dissent from the decisions of the Delhi High Court in Sanghi Motors v. CIT [1982] 135 ITR 359, of the Karnataka High Court in CIT v. Khoday Eswarsa and Sons [1985] 152 1tr 423 and of the Patna High Court in Chandmul Rajgarhia v. CIT [1987] 164 ITR 486. The circular issued by the Central Board of Direct Taxes [1984] 149 ITR (St.) 127, has made the matter easier, for, otherwise, we would have given a larger number of illustrations to show that even in the unamended provision of Section 40 (b), interest paid to a partner in one capacity could not be confused with another capacity of the recipient of the interest. Only one such illustration is being noticed to highlight the point. A trust deposits the amount with a firm in which "a" is a partner. U

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ndisputably, the interest would be an allowable deduction. Later on, "a" becomes a trustee. Could it be said under the unamended law that the interest will be disallowed as one of the trustees was a partner in the assessee-firm? The answer is "no", because the trust is a separate person and has a separate legal entity as compared to "a" who has two capacities--one as an individual and the other as a trustee. Accordingly, we are of the opinion that the Tribunal erred in law in disallowing interest under Section 40 (b) paid to the three individuals who were partners not in their individual capacities, but on behalf of their Hindu undivided families as kartas. The referred question is answered in favour of the assessee and in the affirmative with no order as to costs.
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