A. P. RAVANI, B. S. KAPADIA, P. S. POTI, J.

( 1 ) THIS is a reference of the assessee a Registered Firm and relates to the assessment years 1970-71 and 1971-72; the corresponding accounting years being that ending on 30-6-1969 and 25 One Shri C. S. Virani was a partner of the applicant firm and he joined the partnership representing the Hindu Undivided Family of which he was the Karta. For the two accounting years in question Shri C. S. Virani maintained also accounts with the partnership one his own individual account and the other of the Hindu Undivided Family which he represented as Karta. The firm paid interest on advances made other than the capital by the Hindu Undivided Family represented by Shri C. S. Virani and also advance made by Shri Virani from his own personal account. The interest so paid on individual funds for the assessment year 1970-71 was Rs. 1 30 594 and interest paid on account of the Hindu Undivided Family was the sum of Rs. 26 482 These payments were disallowed by the Income-tax Officer who relied on sec. 40 (b) of the Income-tax Act 1961 for adopting such a course. Similar interest paid during assessment year 1971- 72 was disallowed that being a sum of Rs. 1 37 606 paid on Shri C. S. Viranis personal account and a sum of Rs. 13 929 paid on Hindu Undivided Family account.

( 2 ) THE assessee took up the matter of assessments in appeal be- fore the Appellate Assistant Commissioner of Income-tax but the claim in regard to dis-allowance of interest paid on account of the Hindu Undivided Family was given up ill appeal. The Appellate Assisthat Commissioner rejected the claim of the assessee in regard to the disallowance of interest paid on the individual account held by Shri C. S. Virani and this was confirmed by the income-tax Appellate Tribunal in further appeal.

( 3 ) THE question that was referred so this Court in the background of these facts is whether the Tribunal was justified in law in confirming disallowance of Rs. 1 30 594 for the assessment year 1970-71 and Rs. 1 37 606 for the assessment year 1971-72 being interest paid to Shri C. S. Virani individual under sec. 40 (b) of the Income-tax Act 1961 ?

( 4 ) WHEN the reference came up before a Division Bench of this Court it was felt that the decision of this Court in COMMISSIONER OF INCOME TAX V. SAJJANRAJ DIVANCHAND 126 ITR 654 required reconsideration and therefore reference was made to a larger Beach. That is how the case is now before a Full Bench.

( 5 ) NOW we may refer to the provisions of the Income-tax Act which may have relevance in deciding the question in controversy before us. Secs. 30 to 39 of the Income-tax Act 1961 provide for various allowances and deductions to be made in computing the income chargeable under the head profits and gains of business or profession. Though generally these deductions are to be made for the purpose of determining the net income of any assessee sec. 40 envisages situations where some of the deductions are not to be made and some are to be made in a modified manner in the case of certain classes of assesses. Sub-sec. (a) deals with the case of any assessee sub-sec. (b) deals with the case of any firm sub-sec. (c) deals with the case of any company. and sub-sec. (d) deals with the case of a banking company. We are concerned for the purpose of this case only with sec. 40 (b ). That reads:notwithstanding anything to the contrary in secs. 30 to 39 the following amounts shall not be deducted in computing the income chargeable under the bead 4 profits and gains of business or profession. -. . . . . . . . . . . . . . . . . . . . . . . . (b) in the case of any firm any payment of interest salary bonus commission or remuneration made by the firm to any partner of the firm. The provision corresponding to this in the Income-tax Act 1922 is sec. 10 (4) (b) and the only difference between that section and sec. 40 (b) of the Income-tax Act 1961 is that in the section as it stands besides interest salary commission or remune

Click Here to Read the rest of this document