TMI Blog1984 (10) TMI 20X X X X Extracts X X X X X X X X Extracts X X X X ..... m. These partners also borrowed monies from the partnership firm and paid interest to the assessee. In the computation of income of the assessee-firm for the assessment year 1975-76, the question arose regarding the amount of interest paid to the partners which is liable to be disallowed under section 40(b) of the Act. The Income-tax Officer was of the view that the entire interest paid by the assessee to the partners has to be added back in terms of section 40(b) of the Act, whereas the assessee claimed that it is only that portion of the interest, which is in excess of the interest received by the assessee-firm that could be disallowed under section 40(b). In other words, the assessee's claim was that, from out of the interest paid to the partners, the interest received from the same partners has to be set off and the effective amount, which may be described as the net interest for purposes of convenience, could be disallowed in terms of section 40(b). The Income-tax Officer declined to accept this contention and added back the entire interest paid to the partners by the assessee-firm disregarding the amount of interest received from the partners. On appeal, the Appellate Assista ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... v. Kailash Motors [1982] 134 ITR 312, in support of his proposition that it is only the net interest that has to be added back. Learned counsel also relied on Central Board of Direct Taxes Circular bearing No. 33-D(XXV-24) of 1965, which was reproduced in Direct Taxes Circulars, Vol. 1, by J. P. Bhatnagar (1984 edition) at page 449. It would be appropriate to quote below the circular : " Income-Computation of-Interest charged to a partner on debit balance -Whether the income of the firm. A reference is invited to Board's Circular No. 55 of 1941 on the above subject. In the above circular, it was stated that interest charged, to partner on his overdrawn account should not be included in the total income of the firm. It was further stated that where it appears that the capital borrowed for the purpose of business was partly diverted towards overdrawn account, the correct procedure would be to disallow the proportionate share of the interest payable on this capital in computing the income of the firm. 2. It has been brought to the notice of the Board that under the law as it stands, it would not be correct to exclude interest received by a firm from its partners while computing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 0(b) of the Act, we find that there is nothing in the provision which expressly states that the amount to be added back is either gross or net. The provision requires that " any payment of interest " by a partnership firm to a partner shall not be deducted in computing the income of the partnership firm. For the purpose of finding out the amount paid by way of interest, it is necessary for the Income-tax Officer to find out the amount of interest paid by the partnership firm to the partner and also see if the same partner paid any interest to the partnership firm and ascertain the amount of interest effectively paid by the partnership firm to the partner. It is unnecessary to go into a detailed consideration of the question because the Central Board of Direct Taxes itself had accepted that the real purport of section 40(b) of the Act was to add back only the net amount of interest and not the gross amount. There is no doubt that the decision of the Allahabad High Court in Sri Ram Mahadeo Prasad v. CIT [1953] 24 ITR 176, supports the view that only the net amount of interest has to be added back. The Central Board of Direct Taxes, after referring to the abovesaid decision of the All ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... followed with respect to the preceding assessment years also in order to avoid unnecessary litigation. Learned counsel for the Revenue invited our attention to the decision of the Madras High Court in CIT v. O.M.S.S. Sankaralinga Nadar Co. [1984] 147 ITR 332, where the Madras High Court referred to the above circular of the Central Board of Direct Taxes and observed as under (at page 337) : " Learned counsel pressed on us the departmental circular which was relied on by the Tribunal. When a matter comes before this court for an advisory opinion on the state of the law or of a fiscal principle, or on the construction of any provision in the taxing enactment, the last place where we should look for aid or guidance would be a circular from the Central Board of Direct Taxes on the subject. We are not bound by the Board circulars. Besides, these circulars have the knack of being inconsistent. For, they are, for the most part, circulars for the occasion. We are not, therefore, inclined even to take a look into the circular referred to us. If the circular has expressed a view which the Department has not followed in this case, the remedy is not to ask this court to render an opinion ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h transactions and not to bring them within the mischief of the new provision.' The directions given in that circular clearly deviated from the provisions of the Act, yet this court held that the circular was binding on the Income-tax Officers." The same view was reiterated by the Supreme Court in K.P. Varghese's case [1981] 131 ITR 597 above referred to. The above-mentioned three decisions of the Supreme Court set at rest any doubt as to the binding nature of the circulars issued by the Central Board of Direct Taxes so far as the officials of the Income-tax Department are concerned. We may also refer to two Bench decisions of this court in R. J. K. Ranga Rao v. Commissioner of Expenditure Tax [1979] 116 ITR 154 (AP) and Addl. CIT v. Sarvaraya Textiles Ltd. [1982] 137 ITR 369, which has taken the same view following the above decisions of the Supreme Court. Having regard to the above decisions, we are unable to accede to the submission of the learned standing counsel for the Revenue that the departmental officials are not bound to implement the instructions of the Central Board of Direct Taxes, if such instructions deviate from the correct legal position. We may point out that ..... X X X X Extracts X X X X X X X X Extracts X X X X
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