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Commissioner Of Income-Tax v. Veeriah Reddiar
Factual and Procedural Background
The case concerns a reference under section 66(2) of the Income-Tax Act, 1922, relating to the assessment year 1959–60 and the Malayalam accounting year 1133 M.E. The assessee is a textile business firm based in Alleppey, with one partner named S. Veeriah Reddiar. Previously, the firm operated a business in Bombay, primarily for purchasing goods, which was a losing concern. The Bombay business was dissolved as a partnership on July 15, 1957, with S. Veeriah Reddiar becoming its sole proprietor.
During the relevant period, the Bombay business purchased and dispatched goods valued at Rs. 48,03,852, receiving commissions amounting to Rs. 25,37,496 and paying Rs. 72,565 as interest on borrowings, mostly on hundis. Of this interest, Rs. 66,644 was charged to the assessee by the Bombay business as interest for borrowings made for purchasing goods.
The assessee claimed a deduction of Rs. 66,644 as interest paid to the Bombay business. The Income-Tax Officer disallowed the claim, and subsequent appeals to the Appellate Assistant Commissioner and the Appellate Tribunal followed. The Tribunal initially remanded the matter for further investigation, after which it directed the Income-Tax Officer to allow the deduction based on affidavits from the Bombay parties, concluding that the assessee was entitled to the deduction if the hundials were accepted by all partners. The appeal was allowed by the Tribunal.
The department challenged this, relying on section 10(4)(b) of the Income-Tax Act, 1922, which disallows deductions for payments by way of interest made by a firm to any partner. The question referred to this court was whether the Tribunal was correct in allowing the deduction.
Legal Issues Presented
- Whether the Tribunal was correct in allowing the assessee-firm a deduction for interest payment of Rs. 66,644 made to one of its partners, S. Veeriah Reddiar, in the assessment for the year 1959-60.
- Whether section 10(4)(b) of the Income-Tax Act, 1922, which prohibits deductions for payments of interest made by a firm to a partner, applies when the payment is made not in the partner's capacity as a partner but as a proprietor of a separate business.
- Whether the borrowings made by the Bombay concern, for which interest was paid, were for the assessee-firm or for the Bombay concern itself.
Arguments of the Parties
Assessee's Arguments
- The payments of interest to S. Veeriah Reddiar were not made in his capacity as a partner of the assessee-firm but as the proprietor of the Bombay business.
- Therefore, section 10(4)(b) of the Income-Tax Act, 1922, which disallows deductions for interest payments made to a partner, should not apply.
- The borrowings made in Bombay were for the assessee's business needs, entitling the assessee to claim the interest deduction.
Department's Arguments
- Section 10(4)(b) prohibits any allowance for payments of interest made by a firm to any partner, regardless of the capacity in which the partner receives the payment.
- The Bombay business had ceased to be part of the assessee's firm as of July 15, 1957, and the borrowings were made by the Bombay concern for its own purposes, not on behalf of the assessee.
- The assessee was not authorized, expressly or impliedly, to have the Bombay concern borrow money on its behalf.
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| Goodsir & Co. v. Commissioner of Excess Profits Tax [1948] 16 I.T.R 367, 374, 375 | Interpretation of section 10(4)(b) disallowing deductions for payments made by a firm to a partner, regardless of the capacity in which the partner receives payment. | The court agreed with the interpretation that no distinction exists between payments made to a partner as a partner or in any other character under the section. |
| Cape Brandy Syndicate v. Commissioners of Inland Revenue [1921] 12 T.C 358, 366 | Principle that taxing statutes must be construed strictly according to their clear language without adding or implying words. | The court applied this principle to reject the assessee's argument that payments to a partner could be excluded from section 10(4)(b) by implication or inference. |
Court's Reasoning and Analysis
The court analyzed section 10(4)(b) of the Income-Tax Act, 1922, which explicitly disallows any allowance for payments by way of interest made by a firm to any partner. The court emphasized the clear and unambiguous language of the statute, rejecting attempts to read exceptions or distinctions into it.
It relied on the precedent set in Goodsir & Co., where a similar contention was overruled, and the principle from Cape Brandy Syndicate that taxing statutes must be interpreted strictly as written.
The court found that the Bombay business had ceased to be part of the assessee-firm by July 15, 1957, and there was no evidence that the Bombay concern borrowed money on behalf of the assessee. Therefore, the interest payments made by the Bombay concern could not be treated as payments made by the assessee-firm.
Consequently, the deduction claimed by the assessee for interest paid to the Bombay concern (and by extension to its proprietor, who was a partner in the assessee-firm) was not allowable under the Act.
Holding and Implications
The court held in favour of the department and against the assessee, answering the reference question negatively regarding the correctness of the Tribunal's allowance of the interest deduction.
The direct effect is that the assessee-firm is not entitled to claim the interest payment of Rs. 66,644 as a deduction in its income-tax assessment for the year 1959-60. No costs were ordered, and the judgment was directed to be sent to the Income-Tax Appellate Tribunal.
No broader precedent was established beyond affirming the strict application of section 10(4)(b) in the context of payments made to partners.
Narayana Pillai, J.:— This is a reference under section 66(2) of the Income-Tax Act, 1922. The assessment year concerned is 1959–60 and the accounting year, the Malayalam year 1133 M.E The question referred is:
“Whether, on the facts and in the circumstances of the case, the Tribunal was correct in allowing interest payment of Rs. 66,644 by the assessee-firm to one of its partners, S. Veeriah Reddiar, in the assessment of the firm for the year 1959-60.
2. The assessee is a firm doing business in textile goods at Alleppey. One of the partners of the firm is S. Veeriah Reddiar.
3. Previously the firm had business in Bombay also which was mainly for purchasing goods there for trade at Alleppey. The business at Bombay was found to be a losing concern. By an agreement entered into between the partners on July 15, 1957, the partnership was dissolved in respect of the business at Bombay and S. Veeriah Reddiar became the sole proprietor of that business. During the relevant accounting period the total value of the goods purchased and dispatched by the Bombay business to customers amounted to Rs. 48,03,852. Out of it a portion represented value of goods dispatched to the assessee at Alleppey. The Bombay business received a commission altogether of Rs. 25,37,496. It paid Rs. 72,565 by way of interest. That was towards borrowings made mostly on hundis. The amount that was paid by way of interest was charged by the Bombay business to its customers. Out of the total amount of Rs. 72,565 paid by it by way of interest, Rs. 66,644 represented interest charged to the assessee on account of the borrowings made by S. Veeriah Reddiar, who was the proprietor of the Bombay business for purchase of goods by the assessee. The assessee, in its return for the relevant period, claimed a deduction of the amount of Rs. 66,644 on the ground that it represented interest paid by it to the Bombay business. The Income-Tax Officer found that the claim was not admissible. The appeal filed by the assessee before the Appellate Assistant Commissioner was unsuccessful. He filed a further appeal before the Appellate Tribunal. The Appellate Tribunal sent back the case to the Income-Tax Officer for fresh investigation. Thereafter, the Income-Tax Officer sent a remand report to the effect that the business of the assessee was separate and distinct from the Bombay business and that the submission made before the Tribunal on behalf of the assessee had not been proved. After receipt of that report the Appellate Tribunal passed a final order, the operative portion of which runs as follows:
“The parties who accepted the hundials in question are the best persons to speak to the security they accepted. This must establish the assessee's case conclusively. If they looked to all the partners of the assessee-firm and not only Veeriah Reddiar for payment of their hundials, in our opinion, the assessee is entitled to the deduction claimed as interest paid by the assessee to the Bombay parties ultimately. The Income-Tax Officer shall satisfy himself through affidavits to be filed by the assessee from the Bombay parties and allow the deduction.
10. We direct the Income-Tax Officer to amend the assessment and those of the partners accordingly.
11. The appeal is allowed.”
4. The material part of section 10(4)(b) of the Income-Tax Act, 1922, relied upon by the department to show that payment of interest by a firm to one of the partners was not a permissible deduction, runs thus:
“Nothing in clause (ix) or clause (xv) of sub-section (2) shall be deemed to authorise …—
(b) any allowance in respect of any payment by way of interest, salary, commission or remuneration made by a firm to any partner of the firm …”
5. Clause (xv) deals with expenditure (not in the nature of capital expenditure or personal expenses of the assessee) laid out or expended wholly and exclusively for the purposes of such business, profession or vocation.
6. The learned counsel appearing for the assessee contended that payments made by the assessee by way of interest to S. Veeriah Reddiar were not payments made by him in his capacity as a partner of the assessee-firm but as the proprietor of the Bombay concern and so, section 10(4)(b) was not attracted to the case. In overruling a similar contention based on that section, Rajamannar C.J said in Goodsir & Co. v. Commissioner of Excess Profits Tax [1948] 16 I.T.R 367, 374, 375.:
“The language of that provision is clear, and according to well established canons of construction, it is not open to read into the enactment words which are not there or to disregard words which are actually to be found in it. Rowlatt J. observed in Cape Brandy Syndicate v. Commissioners of Inland Revenue [1921] 12 T.C 358, 366. thus:
‘Now of course it is said … that in a taxing Act clear words are necessary to tax the subject. But it is often endeavoured to give to that maxim a wide and fanciful construction. It does not mean that words are to be unduly restricted against the Crown or that there is to be any discrimination against the Crown in such Acts. It means this, I think; it means that in taxation you have to look simply at what is clearly said. There is no roam for any intendment; there is no equity about a tax; there is no presumption as to a tax; you read nothing in; you imply nothing, but you look fairly at what is said; and at what is said clearly and that is the tax.
Looking, then, fairly at what has been said, it is clear that there is no distinction made between payments by way of interest, commission, salary or remuneration made to a partner as a partner and made to him in a different character. There is nothing to indicate that some categories of interest, salary, commission or remuneration, though paid by a firm to a partner, were to fall outside the scope of that provision.”
7. We are in complete agreement with that interpretation of section 10(4)(b).
8. It was then argued that the borrowings made in Bombay for which Rs. 66,644 was paid by way of interest were borrowings made for the assessee and not for the Bombay concern and that, therefore, the assessee was entitled to the allowance claimed. The Bombay concern was an independent one. It had ceased to be a part of the assessee's business by July 15, 1957. There is nothing to indicate that the assessee had either expressly or impliedly authorized the Bombay concern to borrow money on behalf of the assessee. Therefore, it has to be taken that the borrowings made by the Bombay concern were for its own sake and not for the assessee.
9. For the reasons mentioned above we answer the question that has been referred to us in the negative, that is, in favour of the department and against the assessee. We make no order as to costs. A copy of this judgment shall be sent to the Income-Tax Appellate Tribunal.
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