COMMISSIONER OF INCOME-TAX VS NAGPUR GOLDEN TRANSPORT CO., 2000 PTD-DELHI-HIGH-COURT-INDIA 1031 (1997)

(a) Income-tax---

----Depreciation---Machinery purchased by assessee on hire purchase basis-- Assessee is owner of machinery and is entitled to deperciation---Indian Income Tax Act, 1961, S.32.

(b) Income-tax---

----Firm.---Partners----Firm and its partners are two separate legal entities-- Payment of interest to a firm cannot be treated as payment of interest to its partners--.-Payment of interest by one firm to another firm---Cannot be treated as payment to partners of that firm though partners in both firms are common---Indian Income Tax Act, 1961, S. 40(b).

Held, that the Tribunal was right in law in allowing depreciation on trucks purchased by the assessee on hire purchase basis.

CIF (Addl.) v. General Industries Corporation (1985) 155 ITR 430 (Delhi) fol.

The assessee-firm paid interest to another firm, L, the partners in both the firms being, common. The Income-tax Officer held that the payment of interest by one firm to another firm was a payment to the partners of the firm inasmuch as the partners in the two firms were common, which attracted the applicability of section 40(b) of Income Tax Act, 1961, and which had an overriding effect on the provisions of section 36 of the Act. The Tribunal held that payment of interest by one firm to another firm could not be treated as payment of interest to the partners of that firm within the meaning of section 40(b) though the partners in the two firms were common. On a reference:

Held, that while framing an order of assessment under the provisions of the Income Tax Act, 1961, the firm and its partners are to be treated as two separate legal entities and payment of interest to a firm cannot be treated as payment of interest to its partners.

R. D. Jolly and Ms. Prem Lata Bansal for the Commissioner.

Nemo for the Assessee

JUDGMENT

R. C. LAHOTI, J.---This is a reference under section 756(1) of the Income Tax Act, 1961, made at the instance of the Revenue seeking the opinion of the High Court on the following two questions of law arising out of the assessment year 1965-66:

"(1) Whether, on the facts and circumstances of the case, the Tribunal was correct in law in allowing depreciation on trucks purchased by the assessee on hire-purchase basis?

(2) Whether, on the facts and in the circumstances of case, the Tribunal was correct in law in allowing interest paid to partners amounting to Rs.2,859?"

So far as question No. 1 is concerned, the same stands concluded by a Division Bench decision of this Court in Addl. CIT v. General Industries Corporation (1985) 155 ITR 430 wherein the view taken by the Court is that depreciation is to be allowed to the user in the case of a hire purchase agreement. The Tribunal, therefore, was right in allowing depreciation on trucks purchased by the assessee on hire purchase basis.

So far as question No. 2 is concerned, the assessee-firm has paid interest to the firm, Laxmi Chand Jiwan Dass. The controversy arose because the partners in the firm, Laxmi Chand Dewan Das, were the same as were in the assessee-firm. That is to say, the partners in the two firms were common. The Income-tax Officer had formed an opinion that the payment of interest by one firm to the other was a payment to the partners of the firm inasmuch as the partners in the two firms were common, attracting the applicability of section 40(b) which has an overriding effect on provisions of section 36 of the Act. However, the Tribunal has formed an opinion that payment of interest to another firm could not be, treated as payment of interest to the partners of that firm within the meaning of section 40(b) though the partners in the two firms were common.

Having heard learned counsel for Revenue, we are of the opinion that the Tribunal has not erred in taking the view of the law which it has done. The scheme of the Income Tax Act, 1961, shows that the firm and its partners are treated as two separate legal entities so far as the provisions of tax law are concerned. While framing an order of assessment under the provisions of the Income Tax Act, 1961, the firm and its partners are to be treated as two separate legal entitles and payment of interest to a firm cannot be treated in the arc law as payment of interest to its partners.

For the foregoing reasons, both the questions are answered in the affirmative, i.e., in favour of the assessee and against the Revenue.

M.B.A./3348/FC Reference answered.