TMI Blog1988 (5) TMI 24X X X X Extracts X X X X X X X X Extracts X X X X ..... 1982 is as follows: "Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that interest paid to Shri Poonam Chand, who was a partner as karta of his Hindu undivided family in the assessee-firm, on his individual account by the assessee was hit by the provisions of section 40(b) of the Income-tax Act, 1961 ?" In substance, the question of law referred in both the references is the same and is based on the same set of facts. One of the partners of the assessee-firm, Gajanand Poonam Chand Brothers, is Poonam Chand in his representative capacity as the karta of his Hindu undivided family. Apart from this capacity of Poonam Chand representing the Hindu undivided family as its karta for the purpose of partnership of the firm, the said Poonam Chand in his individual capacity had a separate account with the firm. For the assessment years 1974-75, 1978-79 and 1979-80, the assessee-firm paid interest to Poonam Chand On his individual account distinct from his account as partner in his capacity as karta of his Hindu undivided family. A question arose whether section 40(b) of the Income-tax Act, 1961, applied to the interest so paid by t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d respectively), (i) interest paid by the firm to such individual or by such individual to the firm otherwise than as partner in a representative capacity, shall not be taken into account for the purposes of this clause; (ii) interest paid by the firm to such individual or by such individual to the firm as partner in a representative capacity and interest paid by the firm to the person so represented or by the person so represented to the firm, shall be taken into account for the purposes of this clause. Explanation 3.-Where an individual is a partner in a firm otherwise than as partner in a representative capacity, interest paid by the firm to such individual shall not be taken into account for the purposes of this clause, if such interest is received by him on behalf, or for the benefit, of any other person." The three Explanations in clause (b) of section 40 have been inserted by the Taxation Laws (Amendment) Act, 1984, with effect from April 1, 1985. We are here concerned with section 40(b) as it stood without these Explanations during the relevant assessment years. A mere perusal of Explanation 2 inserted in section 40(b) with effect from April 1, 1985, clearly indicat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... thoritative pronouncement of the Supreme Court. In this view of the matter, we are inclined to hold that Explanation 2 is merely declaratory of the existing law as contained in clause (b) of section 40 intended to remove the doubt raised on account of conflicting High Court decisions and it is not a new enacting provision carving out an exception from the general rule contained in clause (b). The ordinary purpose of an Explanation is to clarity that which is already enacted and not to enact something new. No doubt, the Explanation sometimes may, be a distinct enacting provision itself. However, it would then not be performing its ordinary or normal function of an Explanation. We are of the view that the function of Explanation 2 inserted in clause (b) with effect from April 1 , 1985, is its normal function of explaining that which is already contained in clause (b). Incidentally, we may mention that we had an occasion to consider the nature of Explanation 1 inserted in clause (b) of section 40 at the same time with effect from April 1, 1985, in CIT v. Motilal Ramjiwan and Co. [1988] 171 ITR 294 (Rai) (D.B.I.T. Ref. No. 31/81 (Jodhpur), decided on September 2, 1987) and the view t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he basis of the principle that an individual has a distinct legal personality as an "individual" different from his personality as the karta of a Hindu undivided family and, therefore, unless interest is paid by the assessee-firm to him as a partner of the firm, the same cannot be disallowed under section 40(b) of the Act. It is also significant that while taking this view, a strong dissent was expressed against the contrary view taken by the Allahabad High Court, to which we shall refer later. This decision was followed by another Division Bench of the Madras High Court in CIT v. Colombo Stores [1984] 149 ITR 108. We may here mention that some earlier decisions of the Andhra Pradesh High Court, Madras High Court and Gujarat High Court purporting to take a different view are no longer relevant in view of the latest consistent view of these High Courts already indicated by us. We are, therefore, not making any reference to these earlier decisions. A Full Bench of the Madhya Pradesh High Court in CIT v. Narbharam Popatbhai and Sons [1987] 166 ITR 534, has also taken the same view following the decisions we have already cited. There is thus a strong opinion of these several High Court ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... urpose of section 40(b), there can be no dichotomy in the personality of an individual. On this assumption, naturally, the conclusion is that the payment is to be treated as that made to the partner even when it is not to him in his representative capacity as a partner but in a distinct individual capacity. With respect, we are unable to subscribe to either the basis on which the contrary view proceeds or the ultimate conclusion reached on that basis. The reason for our inability to concur with this contrary view has already been indicated by us. We also find that the decisions of other High Courts taking the other view are not considered and their reasoning has not been noticed in the Allahabad decisions. The divergence of judicial opinion on the point was noticed in CIT v. Hari Nath and Co. [1987] 168 ITR 440 (All), but the Division Bench preferred to follow the view taken by that Court in the earlier decisions declining to make a reference to a larger Bench as suggested and without considering the reasons on which the other view is based. It does not appear from this decision that both the learned judges constituting the Division Bench had reservations about the correctness of ..... X X X X Extracts X X X X X X X X Extracts X X X X
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