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Commissioner Of Inco... v. Smt. P. Janaki Bai. ...
Structured Summary of the Opinion delivered by Alladi Kuppuswami, J.
Factual and Procedural Background
The assessee, Janaki Bai, and her minor son, Vaman Rao, jointly owned a building in Hyderabad and together with Narayana Bhat were partners in the firm M/s. New Taj Mahal Hotel, Sultan Bazar, Hyderabad. The assessee held a 37½% share and the minor son held another 37½% share in the partnership. The hotel business was run in premises belonging to the assessee and her minor son. The partnership share of profit determined in respect of the assessee was Rs. 39,847 and an identical amount was determined for the minor son; because the son was a minor his share was included in the assessee's income and the total share income assessed in the assessee's hands was Rs. 79,694.
The assessee claimed deductions for depreciation on the premises used by the firm and for property tax, together amounting to Rs. 4,354. The Income-tax Officer disallowed these claims. The Appellate Assistant Commissioner dismissed the assessee's appeal. On further appeal, the Income-tax Appellate Tribunal allowed the appeal, holding the assessee entitled to depreciation and property-tax allowances. The Commissioner of Income-tax sought a reference to this Court on a question of law regarding depreciation on the building; the Tribunal accepted the request and referred the specified question for decision.
The assessment year was 1966–67 (accounting year ending 3 September 1963) and the Income-tax Act, 1961 governed the matter. The depreciation was contended under section 32 of the Act; issues about the interplay of sections 30–37 and section 67(3) of the 1961 Act were central to the reference.
Legal Issues Presented
- Whether, on the facts and in the circumstances of the case, in computing the assessee's share of profit from the firm M/s. New Taj Mahal Hotel, Hyderabad, depreciation on the building owned by the assessee, in which the business of the firm was run, was an admissible deduction?
Arguments of the Parties
Assessee's Position
- The assessee claimed depreciation (section 32) and property-tax deductions in respect of the building used by the firm; these were allowed by the Income-tax Appellate Tribunal.
- Earlier decisions under the 1922 Act were relied upon (by implication) to support allowing deductions for expenses incurred to earn partnership income.
Department's (Commissioner's) Position
- Sri Rama Rao, standing counsel for the department, conceded that under the earlier Indian Income-tax Act of 1922 a partner could claim such deductions, but argued that the position under the Income-tax Act, 1961 is different.
- The department's argument focused on section 67(3) of the 1961 Act, which permits deduction of interest paid by a partner on capital borrowed for investment in the firm; the contention was that this subsection was exhaustive and, except for that interest, no other deductions (such as depreciation under section 32 or general deductions under sections 30–37) would be permissible in computing a partner's share of income.
- The department relied on the legal principle that a special provision prevails over a general provision (citing authority to that effect) to support the contention that section 67(3) should displace general deductions for a partner's share.
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| Commissioner of Income-tax v. Parvathaneni Chandrasekhara Rao [1960] 40 I.T.R. 195 (A.P.) | Held that a partner is entitled to claim deduction of interest on capital borrowed for the purposes of the partnership from his share of the profits; the business of a firm is the business of each partner and deductions incurred to earn partnership income reduce a partner's taxable income. | Used to support the proposition that deductions incurred by a partner for the purpose of earning partnership income are allowable in his individual assessment; court treated this as precedent favouring deduction claims relating to partnership business. |
| Commissioner Of Income Tax, Bihar v. Ramniklal Kothari | Held that income from a partner's share is income from business and that expenditures incurred by a partner to earn profits from the partnership business may be deductible under provisions analogous to section 10(2)(xv) of the old Act or under general principles. | Relied on to show that a partner may claim deductions for expenditures incurred to earn the partnership share; supports allowance of such deductions under the new Act's corresponding provisions. |
| South India Corporation (P.) Ltd. v. Secretary, Board of Revenue A.I.R. 1964 S.C. 207 | Authority for the general legal principle that when a statute contains a special provision alongside a general one, the special provision may prevail over the general provision. | The Court noted the department's reliance on this principle but rejected its application here because section 67(3) was not intended to be exhaustive; the special-over-general principle was therefore not applied to defeat other deductions under sections 30–37. |
| Subhodchandra Popatlal v. Commissioner of Income-tax and Excess Profits Tax [1953] 24 I.T.R. 566 (Bom.) | Cited also for the principle that a special provision prevails over a general one. | The Court acknowledged the citation but concluded the principle did not alter the construction of the 1961 Act in this case (i.e., did not make section 67(3) exhaustive). |
| Commissioner of Income-tax v. Atma Ram Modi (Patna High Court) | Held that section 67(3) of the 1961 Act is not exhaustive and that a partner may claim deductions under section 37(1) of the Act. | Adopted as supportive authority for the Court's view that section 67(3) does not exclude other permissible deductions under sections 30–37. |
| Commissioner of Income-tax v. Jabarmal Dugar (Rajasthan High Court) | Held that if a deduction could be claimed under any other provision of the Act, that right would not be taken away by section 67(3); expenses such as salaries of a partner's employees were allowable as wholly and exclusively incurred for earning the partner's share. | Relied upon to reinforce the conclusion that section 67(3) does not negate other statutory deductions and that such deductions remain claimable by partners. |
| Matubai Chunilal Patel v. Commissioner of Income-tax | Held that motor expenses including depreciation could be deducted in computing a partner's share of income, relating to partners carrying on the firm's business; observed that section 37 is analogous to the earlier section 10(2)(xv). | Used to corroborate that depreciation and similar expenses, when connected with earning the partnership share, can be deducted in computing a partner's taxable share. |
Court's Reasoning and Analysis
The Court began by identifying the governing statutory framework: the Income-tax Act, 1961, applicable to the assessment year in question, with depreciation claimed under section 32 and general deductions under sections 30–37. Section 67(3) specifically provides a deduction in computing a partner's share for interest paid by a partner on capital borrowed for investment in the firm.
The department argued that section 67(3) was exhaustive with respect to permissible deductions in computing a partner's share, so that no deduction other than the interest specified therein should be allowed. The department relied on the principle that a special provision overrides a general provision and on authorities stating that proposition.
The Court examined the legislative history to test that contention. The Law Commission's twelfth report had proposed a clause (clause 69(3)) which expressly provided that "no other deduction shall be allowed in respect of the said share." The original Bill (introduced 24 April 1961) contained the corresponding clause in the same restrictive terms. However, during parliamentary consideration, at the Select Committee stage the words "no other deduction shall be allowed in respect of the said share" were omitted from the clause that ultimately became section 67(3) of the 1961 Act.
The Court interpreted this deliberate omission as indicating that Parliament did not intend section 67(3) to be exhaustive of permissible deductions. Consequently, there was nothing in the 1961 Act—express or implied—that precluded a partner from claiming deductions available under sections 30–37 (including section 32 for depreciation) in computing his share of the firm's income.
The Court reviewed relevant judicial authorities: decisions under the 1922 Act and decisions under the 1961 Act from other High Courts, many of which supported the availability of deductions to partners for expenditures incurred to earn partnership income. While the Court noted authorities cited by the department for the general rule that a special provision may prevail over a general provision, it concluded that the legislative history and textual context showed that section 67(3) was not intended to displace other statutory deductions.
On this basis, the Court held that sections 67 and 30–37 should be read together and that deductions under section 32 (depreciation) were available to the assessee in computing her share of partnership profits for the relevant assessment year. The Court expressly affirmed the Tribunal's conclusion allowing the depreciation deduction.
Holding and Implications
Holding: On the facts and in the circumstances of the case, in computing the assessee's share of profit from the firm New Taj Mahal Hotel, Hyderabad, the depreciation on the building owned by the assessee in which the business of the firm was run was an admissible deduction.
Implications:
- The Court's decision means the assessee's claim for depreciation on the building (and, as accepted by the Tribunal, related property-tax deduction) is allowable when computing the partner's share of the firm's income for the assessment year concerned.
- The Court interpreted section 67(3) as not being exhaustive; therefore, partners may claim deductions available under sections 30–37 (including section 32) where those deductions legitimately relate to earning the partnership share.
- The opinion does not purport to create any new general principle beyond the interpretative conclusion drawn from the statute and its legislative history; it simply resolves that, under the 1961 Act as enacted, section 67(3) does not extinguish other statutory deductions for partners' shares.
- Direct effect on the parties: the Tribunal's allowance of the deduction was upheld and the Commissioner of Income-tax was ordered to pay the costs of the reference to the assessee; Advocate's fee awarded was Rs. 250.
Costs: The Commissioner of Income-tax will pay the costs of the reference to the assessee. Advocate's fee Rs. 250.
Alladi Kuppuswami, J.:— The assessee, Janaki Bai, and her minor son, Vaman Rao, together own a building in Hyderabad. They are also partners in the firm, M/s. New Taj Mahal Hotel, Sultan Bazar, Hyderabad, along with one Narayana Bhat. The assessee holds 37 ½% share and the minor son holds another 37 ½% share in the said business. The hotel is being run in the premises belonging to the assessee and her minor son. The total share income of the assessee in the partnership was determined at Rs. 39,847 and a similar amount was determined in the case of the assessee's minor son. The son being minor, the minor's share was included in the assessee's income and the total share income from the firm was assessed in the assessee's hands at Rs. 79,694.
2. The assessee claimed deduction of depreciation on the premises in which the hotel is being run and further claimed deduction of the property tax, the two together being Rs. 4,354. The Income-tax Officer disallowed the claim. An appeal to the Appellate Assistant Commissioner was dismissed. On further appeal, the Income-tax Appellate Tribunal held that the assessee was entitled to the allowance of depreciation on the building and also to the allowance of the property tax thereon and allowed the appeal. The Commissioner of Income-tax requested the Tribunal to refer to this court for decision the question of law regarding the depreciation in respect of the building. This request was accepted and the following question of law has been referred to us for decision:
“Whether, on the facts and in the circumstances of the case, in computing the assessed share of profit from the firm, M/s. New Taj Mahal Hotel, Hyderabad, depreciation on the building owned by the assessee, in which the business of the firm was run, was an admissible deduction?”
3. The assessment year in question is 1966–67 for which the relevant accounting year was the year ending September 3, 1963, and, hence, the case is covered by the provisions of the Income-tax Act, 1961. The depreciation is claimed under section 32 of the Act, which provides for depreciation in respect of buildings, machinery, plant or furniture owned by the assessee and used for the purpose of the business or profession. Apart from this there is also a general provision under section 37, under which any expenditure (not being the expenditure of the nature described in sections 30 to 36 and not being in the nature of capital expenditure or personal expenses of the assessee) laid out or expended wholly and exclusively for the purposes of the business or profession shall be allowed in computing the income chargeable under the head “Profits and gains of business or profession”. The corresponding provisions under the Indian Income-tax Act of 1922 were sections 10(2)(vi) and 10(2)(xv), respectively.
4. In Commissioner of Income-tax v. Parvathaneni Chandrasekhara Rao [1960] 40 I.T.R 195 A.P., it was held that a partner of a registered firm is entitled to claim under section 10(2)(iii) of the Income-tax Act deduction of interest paid by him on the capital borrowed for the purposes of the partnership from his share of the profits of the partnership. It was held that the Act contemplates computation of the income of an individual only after allowing the justifiable deduction, i.e, expenses incurred for the purpose of earning that income. In that case it was also held that in order to invest money in partnership, if a partner has to borrow money, he has necessarily to pay interest thereon and hence the real taxable income of a partner is what he receives from the partnership and other sources minus what he has to expend in order to gain it. It was contended that the deductions admissible under section 10 are only in relation to the business carried on by him and has no reference to the business conducted by the firm of which he is partner. This contention was negatived and it was observed, “the business of a firm is the business of each of the partners”. In Commissioner Of Income Tax, Bihar v. Ramniklal Kothari , it was held that the income earned by an individual from his share in a partnership business is income derived from business and if an expenditure was incurred by a partner for the purpose of earning profits from the partnership business, the assessee would be entitled in his individual assessment to claim deduction of the amount under section 10(2)(xv) of the Income-tax Act or under general principles.
5. In the light of these decisions and other decisions which took a similar view, Sri Rama Rao, standing counsel for the department, conceded that the depreciation on the building of the assessee used for the purpose of business of the firm, of which she was a partner could be allowed as a permissible deduction under the Indian Income-tax Act, 1922, but he submitted that the position under the Act of 1961 is different. Though the latter Act contains provisions similar to sections 10(2)(vi) and 10(2)(xv) of the Indian Income-tax Act, 1922, there is a special provision, namely, section 67, which deals with the method of computing a partner's share in the income of the firm. Under section 67(3) it is provided that any “interest paid by a partner on capital borrowed by him for the purposes of investment in the firm shall, in computing his income chargeable under the head ‘Profits and gains of business or profession’ in respect of his share in the income of the firm, be deducted from the share”. He argued that the sub-section is exhaustive of the permissible deductions in computing a partner's share in the income of the firm, and except the interest paid by the partner on the capital borrowed by him, no other deduction is permissible. He submitted that the provisions in sections 30 to 37 which provide for various deductions have no application to the case of a partner's share in the income of the firm. He relied on decisions which lay down that if there is a special provision and a general provision in an enactment, the special provision shall prevail: vide South India Corporation (P.) Ltd. v. Secretary, Board of Revenue A.I.R 1964 S.C 207 and Subhodchandra Popatlal v. Commissioner of Income-tax and Excess Profits Tax [1953] 24 I.T.R 566 Bom... We do not consider that this principle has any application to the circumstances of this case. We do not find anything in the Act of 1961 which either expressly or impliedly precludes the application of sections 30 to 37 to the case of a partner's share in the income from the firm. It is true, section 67 refers to the method of computing a partner's share and section 67(3) provides for deduction of interest paid by a partner on capital. The section, however, does not provide that any other deduction is not permissible. We do not find anything in the Act which will also imply that deductions under sections 30 to 37 are not permissible in the case of a partner's share in the income of the firm.
6. On the other hand, a perusal of the legislative history of this section leads to a contrary conclusion. In the twelfth report of the Law Commission of India, which deals with revision of the Indian Income-tax Act of 1922, the clause corresponding to section 67(3) was clause 69(3) which was as follows:
“Any interest paid by a partner on capital borrowed for the purposes of investment as his capital in the firm shall, in computing his income chargeable under the head ‘Profits and gains of business, profession or vocation’ in respect of his share in the income of the firm, be deducted from the share, but no other deduction shall be allowed in respect of the said share.”
7. Thus, it was provided expressly that no deduction other than what was mentioned in the sub-clause should be allowed. Even when the original Bill was introduced in Parliament on April 24, 1961, clause 67(3) was in the same terms as clause 69(3) of the Report, but when the Bill passed through the Select Committee stage the words “no other deduction shall be allowed in respect of the said share” were omitted. Thus, it is clear that these words were deliberately omitted, obviously because section 67(3) was not intended to be exhaustive and if deduction could be claimed under any other provision of the Act, that right was left untouched. We are, therefore, of the view that section 67 and sections 30 to 37 and in particular section 32 have to be read together in this case. Hence, the Tribunal was right in holding that the deduction was permissible in respect of the building owned by the assessee. The same view has been taken by the Patna High Court in Commissioner of Income-tax v. Atma Ram Modi. It was held that section 67(3) was not exhaustive and a partner is entitled even under the new Act to claim the deduction permitted by section 37(1) of the Act. The Rajasthan High Court also has taken the same view in Commissioner of Income-tax v. Jabarmal Dugar. It was held that if a deduction could be claimed under any other provision of the Act, that right would not be taken away merely by the provisions of section 67(3) of the Act. In that case it was held that the expenses incurred on account of salaries of the accountant and other employees of one of the partners were expenses incurred wholly and exclusively for the purpose of earning income from the business of the firm, of which he was a partner and can be allowed as a deduction.
8. In Matubai Chunilal Patel v. Commissioner of Income-tax it was held that motor expenses including depreciation could be deducted in computing the share income from a partnership as it was related to partners carrying on business of the firm. It was observed that section 37 of the Act is in the same terms as the provisions contained in section 10(2)(xv) of the Act of 1922 and the decisions on section 10(2)(xv) of the Act of 1922 have a direct bearing on the interpretation of section 37(1) of the Act. It is true, however, that there is no discussion on the question whether section 67(3) of the new Act is exhaustive. For the aforesaid reasons we answer the question referred to us for decision as follows:
On the facts and in the circumstances of the case, in computing the assessee's share of profit from the firm, New Taj Mahal Hotel, Hyderabad, the depreciation on the building owned by the assessee in which the business of the firm was run was an admissible deduction.
9. The Commissioner of Income-tax will pay costs of this reference to the assessee. Advocate's fee Rs. 250.
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