KESHAVJI RAVJI & CO. ETC. ETC. versus COMMISSIONER OF INCOME TAX

Citation: [1990] 1 S.C.R. 243 · Decided: 05-02-1990 · Supreme Court of India · Bench: M.N. VENKATACHALIAH · Disposal: Appeal(s) allowed

Cited by 3 judgment(s) · cites 3 · see the full citation network in Lexace

Judgment (excerpt)

KESHAVJI RAVJI & CO. ETC. ETC. 
v. 
COMMISSIONER OF INCOME TAX 
FEBRUARY 5, 1990 
[M.N. VENKATACHALIAH, N.D. OJHA AND 
J.S. VERMA, JJ.] 
Income Tax Act, 1961: .s. 40(b)-Non-deductibility-Interest 
paid by partner on borrowings from firm-Whether to be set off against 
interest paid on his capital. 
Statutory Interpretation: Taxing statutes-Where meaning is plain 
and unambiguous ascertainment of legislative intent not required-
Whether literal interpretation leads to result not intended another con-
struction in consonance with the object to be adopted. express statutory 
provisions departing from general law will prevail over the latter-Rule 
of construction-Not applicable invariably in all circumstances-Where 
a provision is re-enacted using the same word as used in old provision, 
subsequent to judicial ascertainment of meaning of that word, the word 
used in the re-enacted provision to be presumed to bear the same mean-
ing. 'Explanation' provision in statute--Significance and use of Cir-
culars issued by CBDT expressing its views on a statuto1y provision-
Not binding on Court. 
Section 40(b) of the Income Tax Act, 1961, as it stood at the 
relevant time, prohibited deduction of interest, salary, bonus, commis· 
sion or remuneration paid by the firm to the partner. Explanation I 
introdnced thereto by the Taxation Laws (Amendment) Act, 1984, 
which took effect from 1st April, 1985, provided that where interest is 
paid by a firm to a paftner who has also paid interest to the firm, the 
amount of interest to be disallowed shall be limited to the net amount of 
interest paid by the firm to the partner. Circular No. 33D(XXV -24) of 
1965 issued by the Central Board of Direct Taxes provided that where§ 
firm pays interest to as well as receives interest from the same partner, 
only the net interest can be stated to have been received or paid by the 
firm. 
The assessee-appellant, a registered partnership firm, in the account· 
ing year for the assessment year 1975-76, paid interest to the partners on tlie 
amonnts staiiding to their respective credits. It also received from the par• 
tners interest oil their borrowings from the frrin. The Income-tax Officer 
243 
A 
B 
c 
D 
0 
A 
B 
c 
D 
E 
F 
G 
244 
SUPREME COURT REPORTS 
[1990] 1 S.C.R. 
while disallowing the amount of interest paid to the partners did not 
set-off the interest received from them on their borrowings. The Appel-
late Assistant Commissioner allowed the claim of the appellants that only 
the net interest paid to the partners aller setting-off the interest 
received from them was to be disallowed. The Appellate Tribunal 
affirmed the appellate order. The High Court answered the reference in 
favour of the Revenue on the view that the Tribunal was not justified in 
holding that net interest should be disallowed under s. 40(b) of the Act. 
In these appeals by special leave it was cotended for the appellants 
that: (a) the sole object of s. 40(b) was, having regard to the special 
features and legal incidents of a partnership, to enable the assessment of 
the 'real income' of the firm and did not require or compel the exclusion 
of the cross-interest paid by a partner in determining the quantum to be 
disallowed; (b) the extent of the embargo under s. 10(4)(b) of the 1922 
Act on the disallowance of interest paid to a partner was judicially 
interpreted and ascertained in Sri Ram Mahadeo Prasad v. CIT, 24 
ITR 176 All. and when the legislature re-enacted those provisions iu 
s. 40(b) of the 1961 Act iu substantially the same terms, legislature must 
be held to have used that expression with the same implications 
attributed to it by the earlier judicial exposition; (c) the interest paid to 
a partner on the capital brought in by him and the interest received 
from a partner on his borrowings from the firm were both integral 
parts of a method adopted by the partners for adjusting the division of 
profits and iu that sense both payments partook of the same character 
and it would be permissible to take both the payments into considera-
tion in quantifying the interest and treat only such excess, if any, paid 
by the firm as susceptible to the exclusionary rule ins. 40(b); (d) the 
circular of the Central Board of Direct Taxes, which was statutory in 
character, was binding on the authorities and the High Court was in 
error in takin~ a view of the legal position diff«rent from the one indi-
cated in it; and (e) the amendment of 1984 inserting Explanation

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