SUWALAL ANANDILAL JAIN versus COMMISSIONER OF INCOME TAX, BIHAR, RANCHI

Citation: [1997] 2 S.C.R. 793 · Decided: 10-03-1997 · Supreme Court of India · Bench: A.M. AHMADI
Open in Lexace · Ask the AI about this case
Judgment (excerpt)

SUWALAL ANANDILAL JAIN 
v. 
COMMISSIONER OF INCOME TAX, BIHAR, RANCHI 
MARCH 10, 1997 
[A.M. AHMADI, CJ., SUJATA V. MANOHAR AND 
K. VENKATASWAMI, JJ.] 
A 
B 
Income Tax Act, 1961 : Section 40(b) Explanation 2 (added in 1984). 
Income Tax---Deduction~AY 1976-77-Assessee-fir.m comprised of C 
partners in their capacity as Kartas of their respective HUF~Such partners 
invested their personal funds in the assessee- firm-Held: Interest paid by the 
Jinn to such partners on deposits made by them in their individual capacity 
even prior to 1.4.1978 was an allowable deduction by virtue of Expln. 2 to S. 
40(b). 
D 
The assessee-firm comprised of partners in their capacity as Kartas 
of their respective HUFs. The said partners had advanced monies to the 
assessee-firm in their individual capacity. The assessee-firm paid interest 
to them on the interests made in their respective individual capacity. For 
the assessment year 1976-77 the assessee-firm claimed that the interest E 
paid to such partners was an allowable deduction by virtue of Explanation 
2 to Section 40(b) of the Income Tax Act, 1961. The Income Tax Officer 
(ITO) disallowed the claim. The Income Tax Appellate Tribunal confirmed 
the view taken by the ITO. In view of the divergence of views among the 
High Courts on the application of S. 40(b) of the Act, issue has been · F 
referred to this Court, under S. 257 of the Act. 
Answering the reference in favour of the assessee, 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 partners. Explanation 2 to Section 40(b) of the Act is merely declaratory 
in nature. Accordingly even for the period anterior to 1.4.1985, any interest 
paid to a partner, who is a partner representing his HUF on the deposit 
of his personal/individual funds, does not fall within the mischief of 
G 
Section 40(b) of the Act. [796-D, 797-D] 
H 
793 
794 
SUPREME COURT REPORTS 
[1997] 2 S.C.R. 
A 
Brij Mohan Das laxman Das v CIT, JT (1997) 1 SC 155, relied on. 
B 
c 
Gajanand Poonam Chand & Bros. v. CIT, (1984) 174 ITR346 (Raj.), 
approved. 
CIT v. Chidambaram Pillai, (1977) 106 ITR 292, referred to. 
Makhan Lal Hamarayan v. CIT, Tax Case No. 83- 84of1971 (Pat.), 
overruled. 
CIVIL APPELLATE JURISDICTION: Tax Reference Case No. 1 
of 1993. 
From the Order dated 22.9.81 of the Income Tax Appellate Tribunal, 
Patna in LT.A. No. 871 (Pat.) of 1980. 
A. Subba Rao for the Applicant. 
D 
A. Raghuvir, Ms. Lakshmi Iyengar and B.K. Prasad for the 
Respondent. , 
The Judgment of the Court was delivered by 
K. VENKATASWAMI, J. The question that has been referred to this 
E Court under Section 257 of the Income Tax Act, 1961 (hereinafter called 
"the Act") reads as follows : 
F 
''Whether on the facts and circumstances of the case, the assessee's 
claim to the benefit of clause (b) of Section 40 of the Income Tax 
Act, 1961 has been rightly disallowed?". 
The assessment year in question is 1976-77. The case of the assessee 
firm was that M/s. Shanti Kumar Jain, Asok Kumar Jain, Raj Kumar Jain 
and Niranjan were partners in the firm in their capacity as. Karta of 
respective HUF. They have advanced monies to the assessee firm in their 
individual capacity. The assessee firm paid interest to them on the invest-
G ment made in their respective individual capacity. It is the further case of 
the assessee firm that it has maintained two separate ledger accounts of 
the partners : one of individual as loan creditor and another of Karta of 
HUF as partner in the firm. The sources of the money, according to the 
assess, are quite separate. The assessee firm claimed that the interest paid 
H to them shall not be included while computing the mcome chargeable 
-· 
S.A JAIN v. C.l.T. [K. VENKATASWAMI, J.] 
795 
under the head "profits and gains of business or profession". Notwithstand- A 
ing such claim, the Income Tax Officer applied Section 40((b) of the Act 
and completed the assessment by Order dated 29.1.1978. The result was 
that the interest paid to the partners in the circumstances stated above was 
included under the head "profits and gains of business or profession". 
On appeal to the Appellate Assistant Commissioner, the assessment B 
was confirmed by an Appellate Order dated 27.8.1980. Still aggrieved, the 
assessee firm preferred further appeal to the Income Tax Appellate 
Tribunal. The Tribunal relying upon an unreported decision of the Patna
Excerpt shown. Read the full judgment & AI analysis in Lexace.