COMMISSIONER OF INCOME-TAX Vs. ALSPPLSUBRAMANIAN CHETTIAR

JUDGEMENT

(1.) This case has been referred to us under Section 66(3) in pursuance of an order of this Court requiring the Commissioner of Income-tax to state a case and refer it.

(2.) The facts of the case are as follows: - According to a deed of partnership, dated 29 July, 1921, Exhibit A, A.L.S.P.P.L. Subramanian Chettiar and A.R.S.S.P. Subramanian Chettiar entered into a partnership according to the terms of which the former contributed Rs. 15,750 as his % share of the capital and the latter contributed Rs. 5,250 being J share of the capital, the initial capital agreed being Rs. 21,000 and they were to share the profit and loss in the ratio of 3 to 1. The document also contemplates that, if necessary, further sums may be contributed by either party towards the additional capital of the business and that interest should be charged on it. The Commissioner has found that the senior partner advanced a sum of Rs. 4,01,251 as additional capital in parts at various times and that the junior contributed comparatively a very small sum. The amount of interest on the senior partner's advances comes to Rs. 40,757 and the interest on the junior partner's advances to Rs. 78. It is now claimed on behalf of the partnership that the total of these two amounts of interest paid to the partners for sums advanced by them should be deducted in estimating the amount on which the partnership should be assessed for income-tax under Section 10(2)(iii). The Assistant Commissioner held that the whole of the additional sums advanced by the partners must be regarded really as the capital of the firm. On appeal the Commissioner in his order conceded that a partner may sometimes occupy a dual capacity, that is, he may lend a definite sum of money to the firm on a formal document in which case it would be regarded as a loan; but in the present case the sums advanced by the partners cannot be regarded as loans but as surplus capital . The question to be decided by us is whether the sums advanced by the partners should be regarded as "capital borrowed for the purposes of the business" within the meaning of Section 10(2)(iii). In the argument before us the learned vakil who appeared for the Commissioner admitted that the sums advanced by the partners were capital, but he denied that it is capital "borrowed". The proposition of law for which he contended is that though a partner may make a loan to the partnership he cannot lend capital to-the partnership and that additional capital required for the purposes of the partnership can be borrowed only from outsiders, in other words, though capital may be borrowed from outsiders, capital cannot be borrowed from a partner. He cited no authority for this proposition. The sub-clause itself does not contain any limitation as to the person from whom capital is to be borrowed. Once it is conceded that a partner can lend money just like any other third person it is difficult to see why he cannot lend capital also. Whether the money lent is capital or a mere loan really depends on the use to which it is put and not on the person from whom it was borrowed. If it is used for purposes similar to those for which initial capital is used, then it is capital in the hands of the partners by reason of the use which it is put to though it was money borrowed from the partners. It is not the character of the lender that determines whether the sum borrowed is capital or not. The Commissioner seems to think that, if a sum of money is deposited with the partnership temporarily for reasons unconnected with the business, it is a loan, but if it is invested for a much longer time than the business required it, the initial capital being insufficient, then it becomes surplus capital and not a loan. We are not able to follow these distinctions of the Commissioner. All sums lent to the partnership are loans whoever the parties and whatever the purpose for which they are lent. After being borrowed, if they are used like capital, they become borrowed capital, and, if they are not so used, they continue to be mere loans, the expenditure not being in the nature of capital expenditure (vide Clause 9 of, the same sub-section). In the present case the Commissioner himself found that it was capital and there is no doubt also that it was borrowed from the partners. That being so, we are of opinion that Section 10(2)(iii) applies.

(3.) It is said that there is a finding of fact by the Commissioner that the sums in question in this case are not capital borrowed within the meaning of the clause in question. The so-called finding of fact is really based upon certain facts pure and simple as to which there is no dispute and which are accepted on all hands plus certain supposed legal principles on which the Commissioner relies but for which there is really no authority. Wherever a sum is borrowed and it is afterwards used for capital expenditure it is not open to the Commissioner to find that it is not borrowed capital as there is no such principle of law as is contended before us on behalf of the Commissioner. It is also said that there is a finding that the initial capital was nominal and from the beginning additional capital was intended. Here again there is no dispute about the facts. The initial capital consisting of two amounts which the parties were bound to contribute is known. So far as additional or surplus capital is concerned no partner is bound to advance any particular sum. All that the deed provides is that if a partner chooses to advance certain sums he will be entitled to interest, but he is not compellable to do so. It is clear, therefore, that what is called surplus capital has different characteristics from the initial capital and it is not open to ignore this difference. The fact that a large business was contemplated for which the small initial capital would not be enough and additional capital would therefore be required has really no bearing on the legal aspect of the question, additional capital having different incidents from initial capital. Moreover, however high may be the proportion one partner may contribute in the form of additional capital relatively to the other partner, it will have no bearing on the proportion in which the profits are to be taken. This again shows that it is not open to regard additional capital as really initial capital. The Commissioner's finding being based on misconceptions of law cannot be accepted as findings of fact binding upon us.