Commissioner of Income-tax Vs. Sri Krishna Motor and Engineering Works and ors. - Court Judgment

Excerpt:
direct taxation - indirect payment - sections 28, 30 to 38, 40, 171 and 171 (9) of income tax act, 1961 - whether interest paid by assessee-firm in respect of amounts of share capital received by son and daughter of one of partners as a result of partial partition cannot be added under sections 40 (b) and 171 (9) - revenue contended that with regard to interest paid to son and daughter of one of partners of firm their status as divided members of hindu undivided family (huf) cannot be recognised having regard to prohibition contained in section 171 (9) - thus receipt of interest to be treated as receipt of income by huf - assessee contended that fiction incorporated in clause (b) of section 171 (9) to be confined to matters of assessment of huf and cannot be extended to assessment of income of firm - disallowance of amount claimed by firm does not tantamount to extending fiction beyond purpose for which it was intended - it was resorted to prevent huf from resorting to devices of creating several partitions resulting in several independent assessable units aimed at reducing tax liability - held, it was indirect payment to partner since income was to be assessed in hands of huf and thus attracted disallowance under section 40 (b). head note: income tax business disallowance under s. 40(b)--interest to partner--payment of interest by assessee firm to son and daughter of partner who represented as karta of huf, on share capital received by them on partial partition of huf. ratio: on a harmanious reading of both sections 40(b) and explanation thereto with section 171(a), both direct and indirect receipts would have to be considered as being covered by the provisions of section 40(b) in relation to the payment of interest by a firm to a partner. held: it is true that the income was received by the divided members of the huf who are not partners. but their claim that the receipt by them was in a capacity other than as members of the huf by virtue of earlier partial partition, cannot be accepted for the purpose of granting the benefit of section 40(b). the explanation to section 40(b) recognises the receipt of interest by an individual in a representative capacity but what is significant is that only if a member invests his own individual funds unrelated to the funds invested by the huf as a partner in a firm, the firm is entitled to the deduction permissible under section 36 in respect of the interest on the funds of such individual. in view of the peremptory language employed in sub-section (9) it is not legally permissible for the assessing officer to go into the question whether the alleged partition did or did not take place. he must proceed on the assumption that there was no partition at all and on that assumption subject the family to tax on the interest received by the divided members of the family. it, therefore, follows that the interest paid to such divided members assumes the form of interest paid to the huf and as the huf is partner of the firm through the karta, the firm is not entitled to claim deduction of interest paid indirectly to the partner under section 36 of the act. the alleged claim that the individuals have nothing to do with payment of interest to a partner is untenable because such payment to the individuals is itself inextricably linked with the assertion of the earlier partition, the enquiry into which is prohibited. on a harmonious reading of both sections 40(b) and the explanation thereto with section 171(9), both direct and indirect receipts, will have to be considered as being covered by the provisions of section 40(b) in relation to the payment of interest by a firm to a partner. any fiction created by a statute should be limited to the stated purpose and in the present case to the assessment of the huf and should not be extended beyond that purpose. the disallowance of the amount claimed by the firm tantamounts to extending the fiction beyond the purpose for which it was intended. this was intended to prevent the huf from resorting to devices of creating serveral partitions resulting in several independent assessable units aimed at reducing the tax liability. the words `any payment of interest.......by the firm to any partner of the firm,' must include the payments made directly or indirectly to any partner, who is a partner in the case of an huf. the karta representing huf is a partner notwithstanding the claim that there was a partial partition resulting in splitting up of the capital. since the income has to be assessed in the hands of the huf by reason of section 171(9), it is indirect payment to the partner attracting the disallowance under sction 40(b), therefore, the answer of the question in each of the referred cases is in favour of the revenue and against the assessee. application: not to current assessment years a. y.: 1980-81 income tax act 1961 s.40(b) income tax act 1961 s.171(9) - maximssections 2(xv) & 3(1) & (3): [v.v.s. rao, n.v. ramana & p.s. narayana, jj] ghee as a live stock product held, [per v.v.s. rao & n.v. ramana, jj - majority] since ages, milk is preserved by souring with aid of lactic cultures. the first of such resultant products developed is curd or yogurt (dahi) obtained by fermenting milk. dahi when subjected to churning yields butter (makkhan) and buttermilk as by product. the shelf life of dahi is two days whereas that of butter is a week. by simmering unsalted butter in a pot until all water is boiled, ghee is obtained which has shelf life of more than a year in controlled conditions. ghee at least as of now is most synthesized, ghee is a natural product derived ultimately from milk. so to say, milk is converted to dahi, then butter. scientifically or common sense point of view, even though ghee is not directly obtained from milk (which is certainly a product of cow/buffalo), it is certainly a product of a product of livestock i.e., cow or buffalo. it would be rather illogical or irrational to say that ghee is not a milk/dairy product or to say that it is not a product of livestock. section 2(x) and 2(iv) of the act used the plural products of livestock. the legislative intention is very clear that not only a product of livestock like milk (when notified by government), butter etc., are products of livestock but even derivative items (derived from a product of livestock) are intended to be product of livestock for the purpose of the act. thus the term ghee is to be interpreted on the basis of expression products of livestock as defined in section 2(xv) of the act. whatever products are declared as such by the government by notification, they become products of livestock for purpose of the act. consequently it was held that ghee is the product of livestock and by reason of power conferred under section 3(1) read with section 3(3) of the act on them it is competent for the government to declare ghee as product of livestock for the purpose of regulating its purchase and sale, in any notified market area. [per p.s. narayana, j,(dissenting)]if livestock or agricultural produce and the categories thereof had been specified in the statute itself by appending in the schedule or otherwise, that would stand on a different footing from the present provisions of the act which contemplate the issuance of notifications in accordance with the procedure ordained by the provisions specified supra. in view of the clear definition of the livestock and products of livestock, the ghee being derivative of butter or cream, if the language employed in definition to be taken as they stand, the only conclusion would be is that the ghee would not fall within ambit of the definitions aforesaid. sections 4 & 3: [v.v.s. rao, n.v. ramana & p.s. narayana, jj] declaration of notified area held, it is only under section 3 that government are required to publish draft notification inviting objections and section 3(3) mandates to consider objections and suggestions before issuing declaration order. it is very conspicuous that section 4 does not contemplate any draft notification inviting objections and suggestions before either constituting market committee, establishing notified market area or declaring notified market area for the purpose of levy of market fees. thus, except ordaining government to issue preliminary/draft notification inviting objections at the time of issuing declaration order under section 3(3) of the act nowhere much less under section 4 contemplates issuing a notification inviting objections. when the legislature has chosen to exclude principles of natural justice, the court cannot introduce rule of audi alteram partem and render statutory provisions unworkable. in such a case, maxim, expressum facit cessare tacitum (when there is express mention of certain things, then anything not mentioned is excluded) would apply. section 7: [v.v.s. rao, n.v. ramana & p.s. narayana, jj] levy of market fee element of quid pro quo - held, levying fees and tax are two forms of exercise of sttaes taxing power. there is no quid pro quo between tax payer and public authority as tax is a part of common burden. it is also well settled that fee is charge for special service or a benefit given to a class of individual fee payers and fee collected need not have correlation with actual service in exactitude but if it is shown that substantial portion of the fee is expended or the purpose for which it is levied, it would be justified. expressum facit cessare tacitum sections 4 & 3: [v.v.s. rao, n.v. ramana & p.s. narayana, jj] meaning when there is express mention of certain things, then anything not mentioned is excluded. m.n. rao, j.1. in all these matters a common question concerning the interpretation of section 40(b) read with section 171(9) of the income-tax act, 1961, arises for our consideration. it is enough to state illustratively one question referred for the opinion of this court by the income-tax tribunal in r.c. no. 40 of 1988 which is as follows : 'whether, on the facts and in the circumstances of the case and in law, the appellate tribunal was correct in holding that the interest of rs. 21,170 paid by the assessee-firm in respect of amounts of share capital received by the son and daughter of sri s. krishna rao as a result of partial partition on march 31, 1979, cannot be added under section 40(b) read with section 171(9) ?'2. the assessee in r.c. no. 40 of 1988 is a registered firm consisting of four partners. two partners, krishna rao and narayana rao, had each 35 per cent. share in the profits and the remaining two partners, pankajam and sai leela, each had 15 per cent. share in the profits. krishna rao was partner in the firm representing the hindu undivided family of which he was a karta. a partial partition was effected on march 31, 1979, in consequence of which the interest in the partnership firm was partitioned among the members of the family; narasimham s/o krishna rao and parimala d/o krishna rao were allotted amounts of rs. 1,02,608 and rs. 15,000, respectively. during the relevant accounting period, the firm paid interest of rs. 18,470 and rs. 2,700 to narasimham and parimala, son and daughter of krishna rao. ignoring the alleged partial partition, having regard to the provision under section 171(9) of the income-tax act, 1961, the assessing officer added an amount of rs. 21,170 to the income of the assessee-firm under section 40(b) of the act. on appeal, the appellate assistant commissioner was of the view that inasmuch as the hindu undivided family was originally represented in the firm by some other coparcener and as narasimham and parimala were not partners of the assessee-partnership firm, section 40(b) was not applicable. he, therefore, deleted the addition of rs. 21,170. on appeal by the department, the tribunal upheld the order of the appellate assistant commissioner following its earlier view taken in k. appala narasimhulu and sons v. ito in i.t.a. no. 556/hyd of 1982. at the instance of the revenue, the aforesaid question was referred for the opinion of this court. r.c. no. 241 of 1990 arising out of i.t. no. 556 of 1982 is also included in this batch. 3. in all the six referred cases, the same question arises for consideration although the amounts of interest are different, the dates of alleged partition are different but they all took place after december 31, 1978. 4. section 40(b) specifies the amounts not to be deducted in the computation of income chargeable to tax under the head 'profits and gains of business or profession' notwithstanding anything to the contrary in sections 30 - 38. clause (b) of section 40(b) as it stood at the relevant time read as follows :- 'section 40(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; explanation 1. - where interest is paid by a firm to any partner of the firm who has also paid interest to the firm, the amount of interest to be disallowed under this clause shall be limited to the amount by which the payment of interest by the firm to the partner exceeds the payment of interest by the partner to the firm. explanation 2. - where an individual is a partner in a firm on behalf, or for the benefit, of any other person (such partner and the other person being hereinafter referred to as 'partner in a representative capacity' and 'person so represented' respectively), - (i) interest paid by the firm to such individual or by such individual to the firm otherwise than as partner in a representative capacity, shall not be taken into account for the purposes of this clause; (ii) interest paid by the firm to such individual or by such individual to the firm as partner in a representative capacity and interest paid by the firm to the person so represented or by the person so represented to the firm, shall be taken into account for the purposes of this clause. explanation 3. - where an individual is a partner in a firm otherwise than as partner in a representative capacity, interest paid by the firm to such individual shall not be taken into account for the purposes of this clause, if such interest is received by him on behalf, or for the benefit, of any other person.' 5. the assessment of the hindu undivided family after partition is dealt with under section 171. sub-sections (1) and (9) which are relevant read as follows : section 171 : '(1) a hindu family hitherto assessed as undivided shall be deemed for the purposes of this act to continue to be a hindu undivided family, except where and in so far as a finding of partition has been given under this section in respect of the hindu undivided family... (9) notwithstanding anything contained in the foregoing provisions of this section, where a partial partition has taken place after the 31st day of december, 1978, among the members of a hindu undivided family hitherto assessed as undivided, - (a) no claim that such partial partition has taken place shall be inquired into under sub-section (2) and no finding shall be recorded under sub-section (3) that such partial partition had taken place and any finding recorded under sub-section (3) to that effect whether before or after the 18th day of june, 1980, being the date of introduction of the finance (no. 2) bill, 1980, shall be null and void; (b) such family shall continue to be liable to be assessed under this act as if no such partial partition had taken place; (c) each member or group of members of such family immediately before such partial partition and the family shall be jointly and severally liable for any tax, penalty, interest, fine or other sum payable under this act by the family in respect of any period, whether before or after such partial partition; (d) the several liability of any member or group of members aforesaid shall be computed according to the portion of the joint family property allotted to him or it at such partial partition, and the provisions of this act shall apply accordingly.... explanation. - in this section, - (a) 'partition' means - (i) where the property admits of a physical division, a physical division of the property, but a physical division of the income without a physical division of the property producing the income shall not be deemed to be a partition; or (ii) where the property does not admit of a physical division, then such division as the property admits of, but a mere severance of status shall not be deemed to be a partition; (b) 'partial partition' means a partition which is partial as regards the persons constituting the hindu undivided family, or the properties belonging to the hindu undivided family, or both.' 6. sri s.r. ashok, learned senior standing counsel for the revenue contends that with regard to the interest paid to the son and daughter of krishna rao, although they were received by them as individuals not being partners of the firm, their status as divided members of the hindu undivided family could not be recognised having regard to the prohibition contained in sub-section (9) of section 171, and the receipt of the interest by the above two persons must, therefore, be treated as receipt of income by the hindu undivided family, the partner of the firm. in opposition to this, sri ratnakar, learned counsel for one of the respondents, strongly urges that the fiction incorporated in clause (b) of section 171(9) should be confined only to matters of assessment of the hindu undivided family and cannot be extended to assessment of income of the firm. 7. although at first sight what sri ratnakar says appears to be impressive, on a deeper consideration, we think the contention does not merit acceptance. it is true that the income was received by the divided members of the hindu undivided family, who are not partners. but their claim that the receipt by them was in a capacity other than as members of the hindu undivided family by virtue of the earlier partial partition, cannot be accepted for the purpose of granting the benefit of section 40(b). the explanation to section 40(b) recognises the receipt of interest by an individual in a representative capacity but what is significant is that only if a member invests his own individual funds unrelated to the funds invested by the hindu undivided family as a partner in a firm, the firm is entitled to the deduction permissible under section 36 of the act in respect of the interest on the funds of such individual. 8. when what is disallowed is the payment of interest by the firm to a partner, could it be said that the payment made by the firm to the. divided members of the hindu undivided family is payment to a partner. when the divided members themselves are not partners 9. sub-section (9) of section 171 lays down, inter alia, that any claim to partial partition after december 31, 1978, cannot be enquired into and no finding can be recorded under subsection (3) by the assessing officer, and that such family shall continue to be liable to be assessed as if no such partial partition had taken place. in view of the peremptory language employed in sub-section (9) it is not legally permissible for the assessing officer to go into the question whether the alleged partition did or did not take place. he must proceed on the assumption that there was no partition at all and on that assumption subject the family to tax on the interest received by the divided members of the family. it, therefore, follows that the interest paid to such divided members assumes the form of interest paid to the hindu undivided family and as the hindu undivided family is a partner of the firm through the karta, the firm is not entitled to claim deduction of interest paid indirectly to the partner under section 36 of the income-tax act. 10. the alleged claim that the individuals have nothing to do with payment of interest to a partner is untenable because such payment to the individuals is itself inextricably linked with the assertion of the earlier partition, the enquiry into which is prohibited. the punjab and haryana high court in cit v. tej cloth weaving factory , while dealing with an identical question, expressed the view (pages 478, 479) : 'the necessary incident of ignoring the partial partition would be that the investment made by the three hindu undivided families in the assessee-firm continues to be that of the hindu undivided families and the kartas of the hindu undivided families continue to be partners of the assessee-firm. it is nobody's case that the kartas ceased to be the partners of the firm. therefore, even if in the books of account payment of interest is shown to have been made to the corparceners of the three hindu undivided families, in effect, it will be taken as if interest has been paid to the kartas of the hindu undivided families who are partners of the assessee-firm and payment of such interest has to be disallowed by virtue of section 40(b) of the act... there is no carrying forward of the legal fiction to an extent which is not permissible by the statute. sub-section (9) of section 171 of the act itself provides for ignoring the partial partition and for applying the provisions of the act, as if no partial partition had taken place. the amount standing with the assessee-firm on behalf of the hindu undivided family would continue to belong to the hindu undivided family and if this is so, interest paid thereon would be interest paid to the karta as the karta became a partner of the assessee-firm, and payment of interest to such a partner is to be disallowed under section 40(b) of the act . . .' 11. we respectfully agree with the aforesaid view. 12. sri ratnakar, learned counsel for one of the assessees, submitted that the fiction created by section 171(9) has to be confined to the assessment of the hindu undivided family and it was not intended to be extended to any other section because the other provisions in the income-tax act also militate against it. he pointed out that section 194a provides for deduction of tax at source in respect of payment of interest where the aggregate receipts exceed rs. 2,500 in a year and it would be difficult to ascertain the aggregate amount liable for deduction at source if the actual payment to a particular individual is ignored and it is taken to be received by the hindu undivided family. the answer to this is in the provisions of section 194a itself which refers only to the credit of such income to the account of the payee. in view of this specific provision, the tax can be deducted only in respect of the aggregate amount received by the payee and not with reference to the receipts of the person on whose behalf the payee is receiving the amount. in contrast in section 40(b) representative capacity is recognised by the explanation, and, therefore, on a harmonious reading of both section 40(b) and the explanation thereto with section 171(9), both direct and indirect receipts, will have to be considered as being covered by the provisions of section 40(b) in relation to the payment of interest by a firm to a partner. 13. sri ratnakar then submitted that any fiction created by a statute should be limited to the stated purpose and in the present case to the assessment of the hindu undivided family and should not be extended beyond that purpose. we do not think that the disallowance of the amount claimed by the firm is tantamount to extending the fiction beyond the purpose for which it was intended. this was intended to prevent the hindu undivided family from resorting to devices of creating several partitions resulting in several independent assessable units aimed at reducing the tax liability. the words 'any payment of interest... by the firm to any partner of the firm,' in our view must include the payments made directly or indirectly to any partner. who is a partner in the case of a hindu undivided family the karta representing the hindu undivided family is a partner notwithstanding the claim that there was a partial partition resulting in the splitting up of the capital. since the income has to be assessed in the hands of the hindu undivided family by reason of section 171(9) it is indirect payment to the partner attracting the disallowance under section 40(b). we, therefore, answer the question in each of the referred cases in favour of the revenue and against the assessee.