TMI Blog1997 (3) TMI 10X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 Shanti Kumar Jain, Ashok Kumar Jain, Raj Kumar Jain and Niranjan were partners in the firm in their capacity as karta of the respective Hindu undivided family. They have advanced monies to the assessee-firm in their individual capacity. The assessee-firm paid interest to them on the investments 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 Hindu undivided family as partners in the firm. The sources of the money, accord ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2, inter alia, has been added, has observed as follows : " In Gajanand Poonam Chand and Bros. v. CIT [1988] 174 ITR 346, the Rajasthan High Court has taken the view that the said Explanation is merely declaratory in nature and that, therefore, even for the assessment years prior to April 1, 1985, the position of law should be understood to be the same. In support of this proposition, the High Court relied upon the fact that ordinarily the purpose of an Explanation is to clarify that which is already enacted and not to introduce something new. The High Court opined that the Explanation was inserted by Parliament with a view to settle the controversy as to the meaning and effect of the said clause among the several High Courts and that the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l 1, 1985, any interest paid to a partner, who is a partner representing his Hindu undivided family, on the deposit of his personal/individual funds, does not fall within the mischief of clause (b) of section 40. In this view of the matter, we agree with the view taken by the Rajasthan High Court in Gajanand Poonam Chand and Bros' case [1988] 174 ITR 346 that Explanation 2, in the context of clause (b) of section 40, is declaratory in nature. Accordingly, we allow this appeal, set aside the judgment of the High Court and answer the question referred under section 256 in the affirmative, i.e., in favour of the assessee and against the Revenue. " In view of the above pronouncement of this court, we do not think that this question requires a ..... X X X X Extracts X X X X X X X X Extracts X X X X
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