M/S. BRIJ MOHAN DAS LAXMAN DAS versus COMMISSIONER OF INCOME TAX, ALLAHABAD

Citation: [1996] SUPP. 9 S.C.R. 775 · Decided: 10-12-1996 · Supreme Court of India · Bench: B.P. JEEVAN REDDY · Disposal: Appeal(s) allowed
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Judgment (excerpt)

M/S. BRIJ MOHAN DAS LAXMAN DAS 
v. 
COMMISSIONER OF INCOME TAX, ALLAHABAD 
DECEMBER 10, 1996 
[B.P. JEEVAN REDDY AND K.S. PARIPOORNAN, JJ.] 
Income Tax Act, 1961 : Section 40(b) Explanation 2 (Added by Taxa-
tion Laws (Amendment) Act, 1984). 
A 
B 
Interest-Paid to partner-On amount deposited by him in his in-
C 
dividual capacity-AY 1974-7~Such pmtner not being a pa1t11er in his 
individual capacity but representing his HUF-Held : such interest paid did 
not fall within the mischief of S.40(b }-Expln. 2 in the context of S.40(b) was 
declaratory in nature and, therefore, has retrospective effect. 
The appellant-assessee was a registered partnership firm of three D 
partners. One of the partners was the Karta and represented his H.U.F. 
The partnership firm maintained capital and deposit accounts in the name 
of the said partner. The share of profit of the said partner was credited to 
the capital account while the interest paid to him on the deposits made by 
him in his individual capacity was credited to his deposit account. The said E 
partner was assessed in the status of individual and also in the status of 
H.U.F. For the Assessment Year 1974-75, the Income Tax Officer (ITO) 
sought to include the interest paid to the said partner in the income of the 
appellant-assessee since it was a payment made to a partner. 
The appellant-assessee contended that since the amount was paid to 
F 
the said partner in his individual capacity and not in his capacity as a 
partner, the said payment could not be disallowed under Section 40(b) of 
the Income Tax Act, 1961. This plea was rejected by the ITO which was 
upheld by the High Court. Hence this appeal. 
Subsequently, Explanations 1, 2 and 3 to Section 40(b) of the Income G 
Tax Act, 1961 were added by Taxation Laws (Amendment) Act, 1984 with 
effect from 1.4.1985. Explanation 2 expressly provided that any interest 
paid by a firm to any individual otherwise than as partner in repre· 
sentative capacity shall not be taken into account for the purpose of 
Section 40(b) of the Act. 
H 
775 
776 
SUPREME COURT REPORTS [1996] SUPP. 9 S.C.R. 
A 
The question before this Court was whether the said Explanation 2 
B 
was merely declaratory and clarificatory in nature, in which case it would 
govern the previous assessment years as well or whether it was a substan-
tial provision having effect only prospectively. 
Allowing the appeal, this Court 
HELD : 1. Section 40(b) of the Income Tax Act, 1961 is based upon 
and is a recognition of the basic nature of relationship between a firm and 
its partner. Explauation 2 added to Section 40(b) of the Act by Taxation 
Laws (Amendment) Act, 1984 with effect from 1.4.1985 does not preclude 
C an individual, who is a partner representing a H.U.F., from depositing his 
personal funds with the partnership and receiving interest thereon. This 
is the legislative recognition of the theory of different capacities an in-
dividual may hold - no doubt confined to Section 40(b) of the Act. Once 
this is so, there is no reason to hold that this theory of different capacities 
is not valid or available for the period anterior to 1.4.1985 and any interest 
D paid to a partner, who is a partner representing his H.U.F., on the deposit 
of his personal/individual funds, does not fall within the mischief of 
Section 40(b) of the Act. Explanation 2, in the context of clause (b) of 
Section 40, is declaratory in nature. [781-B-C] 
E 
Gaja11a11d Poo11am Chand v. C.I.T., (1984) 174 ITR 346 (Raj.), ap-
proved. 
CIT v. London Machinery Company, (1979) 117 ITR 111 and CIT v. 
Chidambaram Pillai, (1977) 106 ITR 292, referred to. 
F 
Lindley : "Law of Partnership", referred to. 
CIVIL APPELLATE JURISDICTION: Civil Appeal No. 2100 of 
1979. 
From the Judgment and Order dated 22.12.78 of the Allahabad High 
G Court in I.T.R. No. 66 of 1977. 
Jayant Das, M.M. Kshatriya and Ms. Aruna Banerjee for the Appel-
!ant. 
T.L. Vishwanath Iyer, S.Rajappa and S.N. Terdol for the Respon-
H dent. 
BRIJMOHANDASLAXMANDAS v. C.l.T.[B.P.JEEVANREDDY,J.] 777 
The Judgment of the Court was delivered by 
B.P. JEEVAN REDDY, J. Clause (b) of Section 40 of the Income Tax 
Act specifies one of the amounts which shall not be deducted in computing 
the income chargeable under the head "Profits and gains of busineos or 
profession". As it stood at the relevant time, it read thus : 
"40. Notwithstanding anything to the contrary in sections 30 to 39, 
the following amounts shall not be deducted in c
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