Patna High Court
Commissioner Of Income Tax vs Atma Ram Modi on 10 May, 1968
Equivalent citations: 1968(16)BLJR928
JUDGMENT R.L. Narasimham, C.J. and B.N. Jha, J.
1. This is a reference under Section 256(1) of the Indian Income-tax Act, 1961 (hereinafter referred to as the : Act), by the. Income-tax Appellate Tribunal, Patna Branch, referring the following question for the opinion of this Court, namely, whether, on the facts and circumstances of the case, the sum of Rs. 3,400/- can legally be deducted from the assessment of the assessee.
2. The assessee is a Hindu undivided family, of which Shri Atma Ram Modi is the Karta. His income was derived partly from the profits on his shares in two registered partnership firms, known as Bhimraj Banshidhar Daltonganj, on the one hand, and Bhimraj Banshidhar (Construction) on the other. The assessee's shares out of the profits of the said two firms for the assessment year 1963-64 was given as Rs. 24,359. This figure was not challenged. But the assessee claimed a deduction of Rs. 3,400 for the maintenance and depreciation of his motor Car, which, according to him, was used wholly and exclusively for the purposes of his business. The Income Tax Officer and the Appellate Assistant Commissioner disallowed this claim relying mainly on Sub-section (3) of Section 67 of the Act, which is as follows:
Any interest paid by a partner on capital borrowed by him for the purposes of investment in the firm shall, in computing his income chargeable under the head 'Profits and gains of business or profession' in respect of his share in the income of the firm, be deducted from the share.
These two authorities thought that, inasmuch as in Section 67(3) interest alone was shown as a permissible deduction no other deduction could be legally claimed, and that, consequently, the assessee was not entitled to claim further deduction in respect of the depreciation and maintenance of the motor car, even though the car might have been wholly and exclusively used for the said two partnership businesses. The Income Tax Appellate Tribunal, however, held that Sub-section (3) of Section 67 was not exclusive and that, apart from the provisions of that Section it was open to an assessee to claim deduction in respect of any expenditure wholly and exclusively incurred for the purposes of his business, as permitted by Section 37(1) of the Act. The Tribunal then observed that, inasmuch as the assessee's claim that the motor car was used wholly and exclusively for the purposes of the business was not challenged the entire amount claimed should be held as a permissible deduction under Section 37(1). In the statement of the case also, we find that in paragraph 8 the learned Tribunal reiterated this finding of fact, namely, that there was no dispute that the motor car expenses were incurred wholly and exclusively for the purpose of carrying on the business of the firms.
3. The most important question of law which arises for consideration is whether the enumeration of interest in Section 67(3) of the Act as a permissible deduction would, by necessary implication exclude any other deduction where the income of the assessee consists of his share in the profits of a partnership firm of which he is a partner. It was contended by Mr. Tarkeshwar Prasad that no such inference by necessary implication can arise and that, apart from the provisions of Section 67(3) of the Act it was open to the assessee to claim deduction under Section 37(1) also if he could show that the conditions for the eligibility of that claim are either found to exist or are not challenged.
4. We are inclined to accept this contention. At the outset, the law that was in existence prior to the coming into force of the Act may be looked into. In the Indian Income Tax Act, 1922 (hereinafter referred to as the old Act), there was no express provision for deduction of interest as provided in Section 67(3) of the Act. Section 10(2)(xv) of the old Act permitted deduction of the amount laid out or expended wholly and exclusively for the purpose of business or profession where the assessee is assessed in respect of the profits of his business. The new Section corresponding to this Section is Section 37(1) of the Act, which, omitting immaterial portions, is substantially the same. The provisions of the old Act came up for consideration before a Bench of this Court in Commissioner of Income-Tax, Bihar v. Ramnik Lal Kothari 54 I.T.R. 232, where also it was contended that in calculating the profits of a partnership firm the expenses necessarily incurred for earning the profits have to be deducted and that, consequently, when the partner's share in the profits is ultimately given to him there can be no further deduction from that sum in respect of the expenses incurred by him for his business. This argument was rejected by the learned Judges, who, relying on some judgments of the Privy Council and the Bombay High Court observed that, apart, from the expenses to be deducted in calculating the profits of the partnership firm the assessee was entitled to further deduction under Section 10 (2)(xv), because "the true profits and gains of the assessee must be ascertained from the point of view of commercial expediency and commercial accounting. If, therefore, the assessee was able to establish in this case that the expenditure claimed by him was incurred as a matter of commercial expediency and for the purpose of earning profits from the partnership business, the assessee would be entitled to claim the deduction of the amount under Section 10(2)(xv) of the Income Tax Act (old Act) or under the General principle laid down by the Privy Council in Commissioner of Income-tax v. S.M. Chitnavis 59 I.A. 290.
5. It was, however, contended by Mr. Singh for the Department that the aforesaid decision will no longer apply in view of the drastic changes made by the 1961 Act to the Income-tax law. In our opinion, notwithstanding the changes made by the new Act the main principle enunciated therein would apply with equal force. We may, in this connection, refer to Kanga's law of Income Tax, fifth edition, at page 498, where the learned Author observed, while referring to Section 67(3), as follows:
This sub-section gives statutory recognition to the principle judicially recognised that a partner is entitled to a deduction, in computing his share of the firm's profits, in respect of interest paid by him on capital borrowed for the purposes of investment in the firm. But this subsection is not exhaustive of the deductions permissible to a partner in computing his share of the firm's profits. (Page 326 of this very book may also be seen.)
6. The history of the legislation dealing with the insertion of Sub-section (3) in Section 67 of the Act will also afford a useful guide. We find that, when the original bill (Bill No. 27 of 1961) was introduced in the Parliament on the 24th April, 1961 (vide Gazette of India, Extraordinary, Part II, dated the 24th April, 1961, page 243), Sub-clause (3) of Clause 67 of the bill was drafted as follows:
Any interest paid by a partner on capital borrowed by him for the purposes of investment in the firm shall, in computing his income chargeable under the head 'Profits and gains of business or profession' in respect of his share in the income of the firm, be deducted from the share, but no other deduction shall be allowed in respect of the said share.
But, when the bill passed through the Select Committee stage, the italicised words, viz, "no other deduction shall be allowed in respect of the said share," were omitted (see the bill as passed by the Select Committee published in the Gazette of India, Extraordinary, dated the 10th August, 1961, at pages 677/103 and 677/104). Thus, the history of the legislation shows that, though the framers of the Bill first desired that the only permissible deduction should be of interest as indicated in Sub-section (3) of Section 67, and, with a view to make that intention absolutely clear inserted the words "but no other deduction shall be allowed in respect of the said share", those words were deliberately omitted at the Select Committee stage, and, in the Bill, which was finally passed by the Parliament, also those words are not found. The intention of the Legislature is thus very clear. It did not want to make Sub-section (3) of Section 67 exhaustive. If deduction could be claimed according to law under any other provision of the Act, that right would not be taken away merely by the provisions of Sub-section (3) of Section 67. Hence, the natural rule of harmonious construction, which requires full effect to be given to both the Section 37(1) and Section 67(3) of the Act will prevail and the assessee would be entitled to claim the deduction permitted by Sub-section (1) of Section 37, provided the facts necessary for such claim have been stated and found in his favour.
7. Here, the necessary facts are that the expenditure was wholly and exclusively expended for the purposes of business. This statement was not challenged and the Tribunal, as a final court of fact, has definitely found that the entire sum of Rs. 3,400 was expended wholly and exclusively for the purpose of the business of the firm. The assessee's right to claim exemption cannot, therefore, be defeated.
8. For these reasons, the question is answered in the affirmative. The sum of Rs. 3,400 can be legally deducted from the assessment of the assessee. The petitioner shall pay a cost of Rs. 250/- to the assessee-opposite party.