COMMISSIONER OF INCOME-TAX VS GAYATRI DEVI BIRLA, 2000 PTD-MADHYA-PRADESH-HIGH-COURT-INDIA 584 (1996)

Income-tax-

----Amounts not deductible---Firm---Partner---Interest paid by firm to partner---Interest paid by partners to firm on drawings from partnership firm---To be deducted from interest paid to partner--Only net interest taxable in the assessment of firm---Indian Income Tax Act, 1961, S.40(b).

Held, that the interest paid by the partner to the firm should be deducted from the interest received by the partner from the firm and only the net interest should be included in computing the firm's total income.

Keshavji Ravji & Co. v. CIT (1990) 183 ITR I (SC) fol.

V.K. Tankha for the Commissioner

Nemo for the Assessee

JUDGMENT

This is a reference under section 256(2) of the Income Tax Act, 1961, at the instance of the Commissioner of Income-tax on the direction of the High Court. The Tribunal has referred the following question of law for answer by this Court:

"Whether, on the facts and in tire circumstances of the case, the Tribunal is justified in law in holding that the interest paid to Gwalior Agencies should be deducted from interest received from the joint account maintained with Gwalior Agencies and only tlic net interest should be brought to tax?"

The facts giving rise to this reference are that the assessee is a partner in the, firm, Gwalior Agencies. The assessment years involved are 1982-83 and 1983-84. Certain amounts were credited to the account of the assessee in the books of the aforesaid firm for which she was entitled to interest. The books of account carried another account in her name in which her drawings were debited. The firm had been crediting interest to the first account which had a credit balance. The firm had also been debiting interest to the second account which had a debit balance.

During the course of assessment proceedings, it was found by the Income-tax Officer that the assessee had deducted interest from the income for the two assessment years amounting to Rs.1,04,987 and Rs.1,07,887, respectively, on account of the debit balances existing .in her name in the accounts of the aforesaid firm. 1t was stated by the Income-tax Officer that the assessee had made withdrawals from her account with Gwalior Agencies for making payment of income-tax, wealth tax, C.D.S. and for business and non-business purposes. Thus, the Income-tax Officer disallowed an amount of Rs.22,000 for both the years out of the total payment of interest on estimate and reduced the amount admissible as deduction by an equivalent amount.

The assessee filed an appeal against the order of the Income-tax Officer and the Appellate Assistant Commissioner of Income-tax found that issue has been decided by the Tribunal, vide its order, dated October 31,1986, in I.T.As. Nos. 822 to 855/Del of 1985 for the assessment years 1975-76, 1976-77, 1977-78 and 1980-81. Following the said order, the Appellate Assistant Commissioner held that the assessee was entitled to deduction of Rs.22,000 for both the years which had been disallowed by the Income-tax Officer.

Against the order of the Appellate Assistant Commissioner, the Revenue came up in appeal before the Tribunal. Following its order for the earlier assessment years, the departmental appeals were dismissed by the Tribunal. Thereafter, an application was made by the Revenue for making a reference to this Court. The application of the Revenue was rejected by the Tribunal. Hence, an application under section 256(2) of the Income Tax. Act, 1961, was made to this Court and this Court called for a reference of the 'aforesaid question of law for answer by

this Court.

It is not necessary to go into detail and suffice it to say that the question under reference has already been answered by the Supreme Court in favour of the assessee and it has been observed in the case of Keshavji Ravji & Co. v. CIT (1990) 183 ITR 1 (SC) as under (head note):

"Where two or mote transactions on which interest is paid to, or received from, the partner by the firm, are shown to have the element of mutuality and are referable to the funds of the partnership as such, section 40(b) of the income Tax Act, 1961, does not preclude the quantifying of the interest on the basis of such mutuality. In such circumstances, the interest paid to a partner by the firm in excess of what is received from the partner could alone be included under section 40(b), in computing the firm's profits. Circular No. 33-D(XXV-24) of 1965 of the Central Board of Direct Taxes broadly accords with this view in so far as the quantification of interest for purposes of section 40(b) is concerned. "

In the light of this decision of the Supreme Court; the view taken by the Tribunal is correct and we answer this reference in favour of the assessee and against the Revenue.

M.B.A/3228/FCReference answered.