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The court did so, not on a construction of the words of the section, but on equitable grounds of fairness". " (P. 336) Ratio |
The Andhra Pradesh High Court, however, taking the contrary view relied on, what it considered, the revenue 's own understanding of the legal position as made manifest in the Board 's circular that the "real purpose of Section 40(b) of the Act was to add back only the net amount of interest and not the gross amount". R... |
On the interpretation of Section 40(b), the High Court in Rarnanaiah 's case said: "As a matter of interpretation of section 40(b) of the Act, we find that there is nothing in the provision which expressly states that the amount to be added back is either gross or net. PRE |
The provision requires that "any pay ment of interest" by a partnership firm to a partner shall not be deducted in computing the income of the partnership firm. PRE |
For the purpose of finding out the amount paid by way of 254 interest, it is necessary for the Income tax Officer to find out the amount of interest paid by the partnership firm to the partner and also see if the same partner paid any inter est to the partnership firm and ascertain the amount of interest effectively pa... |
The arguments of the learned counsel on both sides covered a wide range of contentions. Ratio |
The submissions of Sri Ramachandran in support of the appeals admit of being formu lated thus: (a) The scheme of Section 40 of the Act does not evince any intention to penalise a firm for the outgoings which are rendered non deductible; but the sole object of Section 40(b) is, having regard to the special features and ... |
The outgoings disallowed by Section 40(b) are not really outgoings at all, but constitute what are, otherwise, ingredients or components of the real income of the firm. ARG |
Therefore, the ascertainment of the real income or the real commercial profits does not require or compel the exclusion of the cross interest paid by a partner in determining the quantum to be disallowed under Section 40(b). ARG |
(b) The extent of the embargo under Section 10(4)(b) of the 1922 Act on the disallowance of "interest" paid to a partner was judicially interpreted and ascertained in Sri Ram Maha deo Prasad vs Commissioner of Income tax, and when the legislature re enacted those provisions in Section 40(b) of the 1961 Act in substanti... |
(c) Interest payable by the partners to the firm pursuant to an agreement between the partners is of the same nature as that payable by the firm to the partners on the capital, brought in by them. ARG |
Interest paid to and received from a partner are both integral parts of a method adopted by the partners for adjusting the division of profits and in that sense both payments partake of the same character. ARG |
In identifying and quantifying the 'interest ' for purposes of 255 Section 40(b) it would be permissible to take both the payments into consideration and treat only such excess, ii any, paid by the firm as susceptible to the exclusionary rule in Section 40(b). ARG |
(d) The circular No. 33 D(XXV 24) of 1965 of the Central Board of Direct 'Faxes, which is statutory in character, is binding on the authorities. ARG |
The High Court was in error in taking a view of the legal position different from the one indicated in it. ARG |
(e) The amendment of 1984 inserting Explanation I in Section 40(b), though later in point; of time, constitutes a legis lative exposition of the correct import of the provision and so construed offers a guide to the correct understanding of the provisions in Section 40(b) in its application to the earlier years as well... |
Re: Contention (a) The premises of the argument is good in parts; but the inference does not logically follow. ARG |
Section 40(b), it is true, seeks to prevent the evasion of tax by diversion of the profits of a firm; but the legislative expedience adopt ed to achieve that objective requires to be given effect on its own language. Ratio |
Section 40 opens with the non obstante clause and directs that certain outgoings specifically enumerated in it "shall not be deducted" in computing the income chargeable under the head "profits and gains of business or profession": As long as there is no ambiguity in the statutory language, resort to any interpretative... |
The supposed intention of the legislature can not then be ap pealed to whittle down the statutory language which is otherwise unambiguous. Ratio |
If the intendment is not in the words used it is nowhere else. Ratio |
The need for interpretation arises when the words used in the statute are, on their own terms, ambivalent and do not manifest the intention of the Legislature. Ratio |
In Doypack Systems Pvt. Ltd. vs Union of India, ; it was observed: "The words in the statute must, prima facie, be given their ordinary meanings. PRE |
Where the grammatical construction is clear and manifest and without doubt, that construction ought to prevail unless there are some strong and obvious reasons to the contrary . " (p. 33 1) PRE |
256 "It has to be reiterated that the object of interpretation of a statute is to discover the intention of the Parliament as expressed in the Act. PRE |
The dominant purpose in construing a statute is to ascertain the intention of the legislature as expressed in the statute, considering it as a whole and in its context. PRE |
That intention, and therefore the meaning of the statute, is primarily to be sought in the words used in the statute itself, which must, if they are plain and unam biguous, be applied as they stand . " (Emphasis Supplied) (p. 332) PRE |
Artificial and unduly latitudinarian rules of construc tion which, with their general tendency to "give the tax payer the breaks", are out of place where the legislation has a fiscal mission. PRE |
Indeed, taxation has ceased to be regarded as an "impertinent intrusion into the sacred rights of private property" and it is now increasingly regarded as a potent fiscal tool of State policy to strike the required balance required in the context of the felt needs of the times between citizens ' claim to enjoyment of h... |
Their application in legal controversies has often times been pushed to an extreme which has defeated the plain and mani fest purpose in enacting the laws. Ratio |
Penal laws have sometimes had all their meaning construed away and in remedial laws, remedies have been found which the legislature never intend ed to give. Ratio |
Something akin to this has befallen the revenue laws . . " (Emphasis Supplied) There are, indeed, strong and compelling considerations against the adoption of the test suggested by Sri Ramachan dran. Ratio |
Limiting of the ambit of Section 40(b) on the supposed 'real income ' test would, perhaps, lead to positions and results, whose dimensions and implications are not, to say the least, fully explored. Ratio |
The test suggested by Sri Rama chandran, might on its own extended logic, validate a set off of the interest paid to one partner against interest received from another and likewise 'interest ' received from one partner on some other deal 257 ings between him and the firm against interest paid to another partner on his ... |
The test of 'real income ' as one on which the operation of Section 40(b) could be sought to be limited is not a reliable one. Ratio |
Indeed, the following observations of this Court on the concept of 'Real Income ' in State Bank of Travancore vs C.I.T. ; at 155, though made in a different context, are apposite: . PRE |
The concept of real income is certainly applicable in judging whether there has been income or not but, in every case, it must be applied with care and within well recognised limits. PRE |
We were invited to abandon legal fundamentalism. PRE |
With a problem like the present one, it is better to adhere to the basic fundamentals of the law with clarity and con sistency than to be carried away by common cliches. PRE |
The concept of real income certainly is a well accepted one and must be applied in appropriate cases but with circumspection and must not be called in aid to defeat the fundamental principles of the law of income tax as developed". PRE |
This contention of Sri Ramachandran rests on generalisation which incur the criticism of being too broad and have cer tain limitations of their own. Ratio |
Contention (a) does not advance appellants ' case. ARG |
Re: Contention (b) The submissions of Sri Ramchandran on the point are that where the meaning of a word used in a statute had been judicially ascertained by a court and where the legislature, while re enacting the law on the subject, uses the same word, it must be taken to have been aware of the meaning so judicially a... |
This is, no doubt, a well recog nised guide to construction. Ratio |
When words acquire a particular meaning or sense because of their authoritative construction by superior courts, they are presumed to have been used in the same sense when used in a subsequent legislation in the same or similar context. Ratio |
This principle was stated by the Judicial Committee in H.H. Ruckmaboye vs Lulloobhoy Mottic hund, Moore 's Indian Appeals, Vol. 5, p. 234 at 250 thus: 258 " . it is, therefore, of considerable importance to ascertain what has been deemed to be the legal import and meaning of them, because, if it shall appear that they ... |
This principle has been reiterated by this Court in several pronouncements. Ratio |
But the limitations of its application in the present cases arise out of the circumstance that the decision of the Allahabad High Court in Sri Ram Mahadeo Prasad vs Commissioner of Income tax, did not proceed or rest on any special or technical connotation of the word "interest" nor any special legal sense which that w... |
The decision proceeded on a construction of the relevant provision i.e. Section 10(4)(b) of the 1922 Act and on what the High Court considered as affording to the assessee a fair treatment. Ratio |
Nothing particu lar stemmed from the interpretation of the expression "interest". Ratio |
The appeal to this principle of construction is, in our opinion, somewhat out of place in this case. Ratio |
The rules of interpretation are not rules of law; they are mere aids to construction and constitute some broad pointers. Ratio |
The interpretative criteria apposite in a given situation may, by themselves, be mutually irreconcilable. Ratio |
It is the task of the Court to decide which one, in the light of all relevant circumstances, ought to prevail. Ratio |
The rules of interpretation are useful servants but quite often tend to become difficult masters. Ratio |
It is appropriate to recall the words of Lord Reid 's in Maunsell vs olins, "Then rules of construction are relied on. Ratio |
They are not rules in the ordinary sense of having some binding force. Ratio |
They are our servants not our masters. Ratio |
They are aids to construction, presumptions or pointers. Ratio |
Not infrequently one 'rule ' points in one direction, another in a different direction. Ratio |
In each case we must look at all relevant circumstances and decide as a matter of judgment what weight to attach to any particular 'rule '. Ratio |
" 259 This passage was referred to with approval by this Court in Utkal Contractors and Joinery vs State of Orissa, ; at 330. Ratio |
Contention (b) is, therefore, not of any assistance to the appellants. ARG |
Re: Contention (c) There are certain aspects of the legal relationship amongst partners which do impart a special complexion to the question under consideration. Ratio |
The point raised in these appeals in confined to a situation where a partner receives interest on the capital subscribed by him and the same partner pays interest on the drawings made by him. Ratio |
A firm under the general law is not a distinct legal entity and has no legal existence of its own. Ratio |
The partner ship property vests in all the partners and in that sense every partner has an interest in assets of the partnership. Ratio |
However, during the subsistence of the partnership no part ner can deal with any portion of the property as his own. Ratio |
In Narayanappa vs Krishtappa, ; , this Court referred to the nature of the interest of a partner in the firm and observed: " . .The whole concept of partnership is to embark upon a joint venture and for that purpose to bring in as capital money or even property including immovable property. PRE |
Once that is done whatever is brought in would cease to be the exclusive property of the person who brought it in. PRE |
It would be the trading asset of the partnership in which all the partners would have interest in proportion to their share in the joint venture of the business of the partnership. PRE |
The person who brought it in would, therefore, not be able to claim or exercise any exclusive right over any property which he has brought in, much less over any other partnership property. PRE |
He would not be able to exercise his right even to the extent of his share in the business of the partnership . PRE |
In CIT vs Chidambaram, at 295 & 296 this Court observed: "Here the first thing that we must grasp is that a firm is not a legal person even though it has some at tributes of personality. PRE |
Partnership is a certain relation between 260 persons, the product of agreement to share the profits of a business. 'Firm ' is a collective noun, a compendious expres sion to designate an entity, not a person. PRE |
In income tax law, a firm is a unit of assessment, by special provisions, but is not a full person which leads to the next step that since a contract of employment requires two distinct persons viz. the employer and the employee, there cannot be a con tract of service, in strict law, between a firm and one of its partn... |
So that any agreement for remuneration of a partner for taking part in the conduct of the business must be regarded as portion of the profits being made over as a reward for the human capital brought in. PRE |
Section 13 of the Partnership Act brings into focus this basis of partnership business." " . . PRE |
It is implicit that the share income of the part ner takes in his salary. PRE |
The telling test is that where a firm suffers loss, the salaried partner 's share in it goes to depress his share of income. PRE |
Surely, therefore, salary is a different label for profits, in the context of a partner 's remuneration" (Underlining Supplied) In Lindley on Partnership (14th Edn.), we find this statement of the law: " . . PRE |
In point of law, a partner may be the debtor or the creditor of his co partners, but he cannot be either debtor or creditor of the firm of which he is himself a member, nor can he be employed by his firm, for a man cannot be his own employer." (p. 30) PRE |
The position as stated above was approved by this Court in Chidabaram 's case. Ratio |
In Regional Director Employees State Insurance Corpora tion, Trichur vs Ramanuja Match Industries, , this Court dealing with the question whether there could be a relationship of master and servant between a firm on the one hand and its partners on the other, indicated that under the law of partnership there can be no ... |
The following observations of Justice Mathew in Ellis vs Joseph Ellis & Co., were referred to with approval: 261 "The argument on behalf of the applicant in this appeal appears to involve a legal impossibility, namely, that the same person can occupy the position of being both master and servant, employer and employed.... |
A partnership firm is not a legal entity. PRE |
This Court in Champaran Cane Concern vs State of Bihar and Anr., pointed out that in a partnership each partner acts as an agent of the other. PRE |
The position of a partner qua the firm is thus not that of a master and a servant or employee which concept involves an element of subordination but that of equality. PRE |
The partnership business belongs to the partners and each one of them is an owner thereof . " (p. 123) "It is thus clear that in the United States, Great Britain and Australia, a partner is not treated as an employee of his firm merely because he receives a wage or remuneration for work done for the firm. PRE |
This view is in complete accord with the jurisprudential approach. PRE |
In the absence of any statutory mandate, we do not think there is any scope for accepting the view of the Rajasthan High Court." (p. 127) PRE |
Sri Ramachandran 's contention is that both the capi tal brought in by the partners to the firm and the amounts that may be drawn by them from the partnership firm partake of the same nature and character as the funds of the partnership. ARG |
This may be so. Ratio |
But in effectuating the conse quences of the recognition of this position, it is necessary to ensure that express provisions of the statute departing from the general law are not whittled down. Ratio |
To the extent that the statute expressly or by necessary implication departs from the general law, the latter cannot be invoked to displace the effect of the statute. Ratio |
But, if there is no such statutory departure the general principles operating in that branch of the law determine the nature of the legal relationship. Ratio |
Sir Francis Bennion in his Statutory Interpretation observes: "Unless the contrary intention appears, an enactment by 262 implication imports any principle or rule of law (whether statutory or non statutory) which prevails in the territory to which the enactment extends and is relevant to its opera tion in that territo... |
"Unless the contrary intention appears, an enactment by implication imports the principle of any legal maxim which prevails in the territory to which the enactment extends and is relevant to the operation of the enactment in that terri tory." (p. 354) Ratio |
What follows is that, to the extent not prohibited by the statute, the incidents of the general law of partners are attracted to ascertain the legal nature and character of a transaction. Ratio |
This is quite apart from distinguishing the 'substance ' of the transaction from its 'from '. Ratio |
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