TMI Blog1970 (12) TMI 20X X X X Extracts X X X X X X X X Extracts X X X X ..... e for payment of any interest on the capital investments of the partners, but they had to pay interest to the firm in respect of their drawings. In the accounting year in question, A. Sudarsanamma, A. Jayalakshmamma and M. Sulochanamma, the assessees-partners, have paid Rs. 12,356, Rs. 12,598 and Rs. 11,306, respectively, towards interest on their withdrawals from the firm. The claim made by the assessees that these amounts of interest paid by them be deducted from their other income was negatived by the Income-tax Officer and the Appellate Assistant Commissioner on appeal. In the appeals to the Appellate Tribunal, the submission of the assessees was three-fold--firstly, that the payment of interest was allowable under section 37(1) of the Act on the ground that it was laid out wholly and exclusively for the purpose of carrying on their business as partners of the firm or to earn the share income ; secondly, that the payments made by the assessees were treated as part of the income of the firm and assessed to tax in its hands and, therefore, it would be inequitable to tax the partners share of the interest in their hands once again ; and, thirdly that the payment of interest by a p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Tribunal is perfectly valid and justified. To appreciate the rival contentions and to arrive at a correct solution of the problem, it is relevant and necessary to notice the material provisions of the Act and what exactly " real profits " mean. Section 4 charges the total income of the previous year of every person at the rate or rates specified in the Finance Act applicable for the assessment year. Clause (31) of section 2 defines " person ". It includes an individual, a Hindu undivided family, a company, a firm, an association of persons or a body of individuals, whether incorporated or not, a local authority and every artificial juridical person not falling within any of the preceding sub-clauses. Hence, a firm and an individual are two distinct separate entities for the purpose of the Act. Similarly so even under the Indian Income-tax Act, 1922. Under section 23(5) of the old Act prior to the amendment of 1956, by section 14 of the Finance Act, 1956, no tax was payable by a registered firm as there was no assessment of its liability. Each partner's share income was apportioned and added to his income and he was charged to tax on his total income as an individual. After 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by making the permissible deductions as per the provisions of the Act. There is a catena of decided cases on the aspect. Suffice it to refer to a few leading cases. The earliest case to be noticed is Gresham Life Assurance Society v. Styles, wherein Lord Chancellor Halsbury observed : " The word 'profits' I think is to be understood in its natural and proper sense-in a sense which no commercial man would misunderstand. But, when once an individual or a company has in that proper sense ascertained what are the profits of his business or his trade, the destination of those profits, or the charge which has been made on those profits by previous agreement or otherwise, is perfectly immaterial. The tax is payable upon the profits realized, and the meaning to my mind is rendered plain by the 'words payable out of profits'. " The aforesaid dictum has been approved by Lord Macmillan in Pondicherry Railway Co. Ltd. v. Commissioner of Imcome-tax. Here, we may notice the following observations of Greene M. R. in British Sugar Manufacturers Ltd. v. Harris : " Once you realise that as a matter of construction the word profits may be used in one sense for one purpose and in another sense f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... see, it is deductible ; but where the income is required to be applied to discharge an obligation after such income reaches the assessee, the same consequence, in law, does not follow. It is the first kind of payment which can truly be excused and not the second. The second payment is merely an obligation to pay another a portion of one's own income, which has been received and is since applied. The first is a case in which the income never reaches the assessee, who even if he were to collect it, does so, not as part of his income, but for and on behalf of the person to whom it is payable. " We may also refer to another decision of the Supreme Court in Murlidhar Himatsingka v. Commissioner of Income-tax, wherein Sikri J., speaking for the court, while dealing with the provisions of section 23(5), prior to 1956, observed thus : " The object of section 23(5)(a) is not to assess the firm itself but to apportion the income among the various partners. After the income has been apportioned, the Income-tax Officer has to find whether it is the partner who is assessable or whether the income should be taken to be the real income of some other person. If it is the real income of another ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the Income-tax Act. Not only that they are assessable as separate entities but the income is chargeable to tax both in the hands of the firm as well as the partners as per the provisions of section 182 read with section 183 of the Act corresponding to section 23(5) of the Income-tax Act, 1922. We are unable to accede to the submission of the assessees that there was no transaction, much less a business transaction, in respect of which the receipt of interest by the firm from the partners is chargeable to income-tax. It is now well-settled that there can be transactions such as sale, mortgage, borrowal, etc., between a partner and the firm and the parties, if aggrieved under any such transaction, can establish their rights in a court of law against the other contracting party. In Commissioner of Income-tax v. W. L. Dahanukar, the assessee therein who contracted to purchase certain lands for Rs. 41,500, later entered into a partnership agreement with one Datar with a view to develop the land and sell it. The land agreed to be purchased by him for Rs. 41,500 was agreed to be taken over by the partnership for Rs. 90,000. The land was in fact conveyed by the vendor of the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... been assessed to tax in the hands of the firm as per the provisions of section 182. After the ascertainment of the taxable profits of the firm, the allocation of respective shares of the three partners, in the instant case, have been made. The share incomes received by the assessees have to be clubbed with their individual incomes received from other sources in order to arrive at the taxable profits received by or accrued to them in the year of account. The transaction relating to the payment of interest by the partners to the firm on the borrowals or withdrawals of the amounts belonging to the firm, whether looked at the substance or the form, is, undoubtedly, a commercial or business transaction which actually earned profits to the firm. We shall now turn to the decided cases relied upon by Mr. Dasaratharama Reddy. In Doughty v. Commissioner of Taxes two partners sold the entire assets including the goodwill of their partnership business to a limited company in which they were the only shareholders. Though the nominal value of the shares was more than the sum credited to the capital account of the partnership, it was held by the Privy Council that there was no separate sale of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r of lorries whose written down value was. Rs. 2,558 by the assessee to the firm valuing them at Rs. 15,000 and crediting that sum being given to the assessee in his capital account with the firm was held by the Madras High Court not to be a transaction amounting to sale or purchase resulting in actual or real profits. In that case, the assessee had contributed the lorries towards his capital account valuing them at Rs. 15,000 though their written down value on that day as per assessment records was Rs. 2,558. In those circumstances, it was held that no profit in fact had arisen to the assessee by the transaction. All the decisions cited by the assessee relate to cases where it was found as a fact that there was no business transaction resulting in actual profit or earning any income liable to be taxed under the Act, and, hence, they are distinguishable from the facts of the case on hand. For the applicability or otherwise of the theory of real income, there must invariably be income which further falls for decision whether it is real or unreal. How far the decision of the Madras High Court in Commissioner of Income-tax v. Janab N. Hyath Butcha Sahib is correct in view of the dec ..... X X X X Extracts X X X X X X X X Extracts X X X X
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