COMMISSIONER OF INCOME TAX Vs. C L BAJORIA

JUDGEMENT

(1.) In this reference under Section 256(1) of the I.T. Act, 1961, the Tribunal has referred the following question to this court:

(2.) The question arises out of the assessment for the assessment year 1966-67. The total income of the assessee for this year was computed at a figure of Rs. 95,482 which had included a sum of Rs. 76,804 for rate purpose. Rs. 76,804 represented the assessee's net share of profit in the unregistered firm of M/s. Soorajmull Nagarmull in which the assessee had one anna six pies share. The assessee's gross share of profit in the said firm came to Rs. 2,20,804 and the ITO reduced it by Rs. 1,44,000 as representing the interest deductible under Section 67(3) of the I.T. Act, 1961. In the course of the appellate proceedings before the AAC, the ITO requested the AAC by a letter dated 1st of September, 1971, that the assessment be enhanced by Rs. 1,44,000 as it was deducted from the share income of the firm erroneously. Apparently, the ITO's plea was that the interest was not allowable as the amount was borrowed by the assessee and given to the firm and utilised for the purpose of the firm was not for the purposes of the firm's business. On the other hand, the assessee resisted the ITO's plea for enhancement on the ground that the interest had been allowed rightly by the ITO, though it was admitted that the amount borrowed was passed on to the firm of M/s. Soorajmull Nagarmull for the payment of taxes. Reliance was also placed before the AAC on a decision of the Madhya Pradesh High Court. The AAC did not accept the assessee's contention that the interest of Rs. 1,44,000 was rightly allowed in the original assessment. Since the amount borrowed by the assessee was utilised by the firm, according to the AAC, for payment of taxes, the AAC held that the assessee had not discharged the onus of showing that the borrowed amount was used for " business purposes ". He, therefore, held that the decision of the Madhya Pradesh High Court upon which the assessee had relied was not applicable to the facts of the case. The alternative plea put up by the assessee that at least 22% of the tax paid by the firm should be related to the appellant and the interest be allowed in that proportion was also similarly rejected. In the result, the AAC accepted the ITO's plea for enhancement and enhanced the total income by Rs. 1,44,000. Being aggrieved by the aforesaid decision of the AAC, the assessee went up in appeal before the Tribunal.

(3.) The matter before the Tribunal was disposed of by a Bench of three learned members, in which, after noting the rival contentions advanced on behalf of the parties, the majority decision of the Tribunal was in favour of the assessee. In this connection, the Vice-President of the Tribunal and the Accountant Member referred to the construction of Section 67(3) and observed that it was by now axiomatic that the share in the profits of the partnership received by a partner was profits or gains of business carried on by him and was liable to be computed as such. The majority members of the Tribunal were of the view that the share income was stamped with the character of business though the firm itself might have derived its income from various business and non-business sources. According to the majority of the members of the Tribunal, it was for this reason that Section 67(2) of the T.T. Act, 1961, had provided that the share of the partners in the income or loss of the firm should be apportioned under the various heads of income in the same manner in which the income or loss of the firm had been determined under each head of income. Section 67(2), therefore, derogated or deviated from the settled principles of law when under Section 67(3) of the Act any interest paid by a partner on capital borrowed by him for the purposes of investment in the firm was made deductible from his income under the head " Profits and gains of business or profession", whether the firm was registered or unregistered and irrespective of the sources from which the firm might have derived its income. The interest of a partner on the capital borrowed by him for the purpose of investment in the firm, according to the majority members of the Tribunal, was deductible in its entirety from his business income, though he might have income from other sources like dividends and property income from the firm. On the construction of Section 67 of the I.T. Act, the majority members of the Tribunal, after referring to several discussions, observed that it was not safe to go by the literal meaning of the expression investment in every case without reference to the context in which it appeared. Section 67(3) permitted deduction of interest on capital borrowed for the purpose of investment in the firm. Any act of investment in the firm, according to the majority members of the Tribunal, would amount to laying out money for profit or with an expectation to derive income from the firm immediately or in the near future. The dictionary meaning of the expression mainly deals with the direct investment in properties, shares, etc. Investment in the firm was an indirect mode of laying out money for profit or routing the funds to the firm which would utilise the funds in the manner it thought best. Therefore, according to the majority members of the Tribunal, all that was required under Section 67(3) was that the partner should borrow some money for the purpose of investment in the firm as capital or as loan. There was no further qualification that the firm should utilise the money in question in any particular manner. The majority members of the Tribunal also referred to the history and several other decisions, some of which we shall presently note. The majority members of the Tribunal also noted that the expression "purpose" is to be distinguished from "motive".