COMMISSIONER OF INCOME TAX, BOMBAY Vs. TEJBHANDAS MOTUMAL.

JUDGEMENT

(1.) THIS is a reference under Section 66(2), Income Tax Act. The assessee is a firm carrying on business at Karachi. This firm was constituted under as agreement which, inter alia, recites as follows : "3. The capitalist partners of the first part shall contribute to the partnership Rs. 1,00,000 (one lac) out of which the partner ship shall pay interest on Rs. 94,900 at the rate of 6 per cent. per annum. The balance of Rs. 5,100 shall not carry any interest. It is optional with the capitalist partners to advance further capital if they so choose in which event the further advances shall carry interest to be borne by the partnership at the same rate as above said."

(2.) DURING the period of assessment in question the firm paid two sums of Rs. 2,166 and Rs. 5,555 to the capitalist partners as interest on a sum of Rs. 76,000 which remained with it in excess of the sum of Rs. 5,100 which was not to carry interest. Before the Income Tax Collector it was contended that in assessing the taxable income of the firm, the Income Tax Collector was bound to make an allowance for both these items of interest in view of the provision of Section 10, clause (2), sub -clause (iii). He, however, disallowed credit for these items, on the ground that that amount invested by the capitalist partner was not capital borrowed but capital contributed. On appeal the Assistant Commissioner of Income Tax upheld the decision of the Income Tax Collector but gave a small relief to the assessee in so far that he allowed a deduction of Rs. 204 -13 -0 on the following ground : "That a sum of Rs. 5,554 -0 -0 had actually been assessed at Quota for the assessment of the year 1928 -29 and 1929 -30, as being the amount earned by the capitalist partner in order to obviate double taxation."

(3.) THE assessee being dissatisfied with the finding of the Assistant Commissioner asked for a reference to this court, and in submitting the case to this Court, the Commissioner has also taken the same view. He has said : "The above clause [cl. (iii) referred to above] distinctly says that the capitalist partners shall contribute to the partnership Rs. 1,00,000 which clearly means that they have to invest a sum Rs. 1,00,000 in the firm as capital. The clause does not say that the capitalist partners shall lend to the partnership Rs. 1,00,000. Hence I am of opinion that in this case the sum of Rs. 1,00,000 is not capital borrowed for the purposes of the business but is capital contributed to the partnership; or in other words, invested in the business by one of the partners. Hence the amount of interest is not allowable."