# The Additional Commissioner of Income Tax v. Ram Prasad

- **Citation:** (2002) 2 ILRA 599
- **Court:** High Court of Judicature at Allahabad
- **Decided:** 2002
- **Case number:** I.T.R. No. 205 of 1983
- **Bench:** S.K. Sen, C.J. Ashok Bhushan
- **Source:** https://unisonlegal.in/judgment/allahabad-high-court/the-additional-commissioner-of-income-tax-v-ram-prasad-39871
- **Pages:** 10

## Headnote

Income Tax Act 1961 - Section 40 (b)
whether
the
interest
paid
to
the
Assessee can not be included in the hand
of U.D.F. Firm ? held 'No'

Held - Para 14 & 15

It appears that the Supreme Court in the
case of M/s Brij Mohan Das Laxman Das
(Supra) held that even for the period
anterior to April 1, 1985 any interest
paid to a partner, who is a partner
representing his Hindu undivided family
on the deposit of his personal/individual
funds, does not fall within the mischief
of clause (b) of Section 40 of the Act and
agreed with the view of Rajasthan High
Court Explanation 2, in the context of
clause (b) of Section 40, is declaratory in
nature.

In the case of M/s Suwala Anandilal Jain
Vs. Commissioner of Income Tax, Bihar,
Ranchi reported in AIR 1997 SC 1278,
the Supreme Court followed the same
principle of law laid down earlier in the
case of M/s Brij Mohan Das Laxman Das
(Supra).
Case law discussed:
1958 I.T.R. 312
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 INDIAN LAW REPORTS ALLAHABAD SERIES [2002
600
1969 I.T.R. 890
J.T. 1997 (i) SC-115
(1984) 174 I.T.R. 346
(1977) 106 I.T.R. 292

## Text

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2 All] The Additional Commissioner of Income Tax V. Ram Prasad
599
after being fully manufactured, are tested
by feeding them with plastic granules to
see
whether
the
machines
so
manufactured produce lay flat tubing
without any defects. Therefore, the plastic
granules are used after the final product,
namely,
the
extrusion
machine,
manufactured by the applicant is fully
finished. It is only to detect defects, if
any, in the finished product.

18. In this view of the matter, and
having regard to the scope of Rule 57-A
of the Act, we are unable to accept the
contention of the applicant that materials
used for testing the fully finished
machines would also be the materials
used in or in relation to the manufacture
of the final product, namely, the extrusion
machine. In the instant case, we find that
Form fill and Seal Machine is used for
testing
its
performance.
Testing
performance
is
not
a
process
of
manufacture
and,
therefore,
flexible
plastic
films
used
for
testing
the
performance of the machine cannot be
termed as "inputs" for the purpose of
allowing MODVAT Credit of duty paid
on flexible plastic films.

19. In the above facts and
circumstances of the case, we are unable
to accept the contention of the applicant.
Accordingly, both the questions are
answered in the negative, i.e. against the
applicant
and
in
favour
of
the
respondents.

The reference stands disposed of
accordingly.
---------
REVISION JURISDICTION
CIVIL SIDE
DATED: ALLAHABAD AUGUST 26TH , 2002

BEFORE
THE HON'BLE S.K. SEN, C.J.
THE HON'BLE ASHOK BHUSHAN, J.

I.T.R. No. 205 of 1983

The Additional Commissioner of Income
Tax, Lucknow

 ...Applicant
Versus
Ram Prasad

 ...Respondent

Counsel for the Applicant:
Sri Prakash Krishna

Counsel for the Respondent:
Sri V.K. Rastogi

Income Tax Act 1961 - Section 40 (b)
whether
the
interest
paid
to
the
Assessee can not be included in the hand
of U.D.F. Firm ? held 'No'

Held - Para 14 & 15

It appears that the Supreme Court in the
case of M/s Brij Mohan Das Laxman Das
(Supra) held that even for the period
anterior to April 1, 1985 any interest
paid to a partner, who is a partner
representing his Hindu undivided family
on the deposit of his personal/individual
funds, does not fall within the mischief
of clause (b) of Section 40 of the Act and
agreed with the view of Rajasthan High
Court Explanation 2, in the context of
clause (b) of Section 40, is declaratory in
nature.

In the case of M/s Suwala Anandilal Jain
Vs. Commissioner of Income Tax, Bihar,
Ranchi reported in AIR 1997 SC 1278,
the Supreme Court followed the same
principle of law laid down earlier in the
case of M/s Brij Mohan Das Laxman Das
(Supra).
Case law discussed:
1958 I.T.R. 312
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 INDIAN LAW REPORTS ALLAHABAD SERIES [2002
600
1969 I.T.R. 890
J.T. 1997 (i) SC-115
(1984) 174 I.T.R. 346
(1977) 106 I.T.R. 292

(Delivered by Hon'ble S.K. Sen, C.J.)

1. We have heard Sri Prakash
Krishna, learned counsel for the Revenue
and Sri V.K. Rastogi, learned counsel for
the Respondent.

2. Brief facts of the reference which
relate to assessment years 1969-1970 and
1970-1971, inter alia, are that M/S
Bhagwati Prasad Ram Sarup was a Hindu
undivided family, which was assessed as
such for and up to the assessment year
1952-1953. There was a partition in the
joint family on 9.11.1950 and a firm was
formed w.e.f. the assessment year 19521953. The firm has been assessed to tax
from the said assessment year up to date.
S/Sri Ram Sarup and Ram Prasad, who
were real brothers, were the two partners
of the firm having equal shares in the firm
as constituted, on the partition of the
family. Both S/Shri Ram Prasad and Ram
Sarup were assessed to Income tax for
their assessment year 1956-1957. For and
up to the assessment year 1968-1969 they
were assessed as individuals and w.e.f.
the year 1969-70 they were assessed as an
HUF. However, the income on which they
were assessed arose out of the assets,
which were received, on the partition of
the joint family and the assessments for
all the years should have been made in the
assessments of HUF. In connection with
the assessment year 1964-65 the Income
tax Officer received information that the
partners had accounts in banks, which
were not incorporated in the books of the
firm. So far as Shri Ram Prasad is
concerned he came up with a disclosure
petition dated 9.8.1965 disclosing an
income of Rs.76,062/-, which had escaped
assessment and requested that the same be
assessed for the assessment years 19561957 to 1964-65. As per that disclosure he
had Rs.43,919.99 at the end of the
financial year 1953-54 which was outside
the account books of the firm. Shri Ram
Sarup did not make any disclosure
petition. In his case, it was found that
there were deposits in the bank in 1954 to
the extent of Rs.34,200/- as under:

14.7.1954
Rs.10,200/-
29.12.1954
Rs.12,000/-
29.12.1954
Rs.12,000/-
Rs.34,200/-

3. Thereafter he was found to have
made further deposits of Rs.20,000/- and
Rs.10,000/- in the subsequent years. The
assessments of S/Shri Ram Prasad and
Ram Sarup were reopened for the
assessment years 1956-57 to 1963-64
under
section
147
to
assess
the
undisclosed income represented by the
bank deposits and interest thereon. The
position
of
unexplained
investments
surrendered for assessment in the case of
Ram Prasad was that Rs.31,000/- were
surrendered in the assessment year 195657 and Rs.800/- in the assessment year
1960-61 total Rs.39,000/-. The position in
the case of Ram sarup was that he
surrendered Rs.10,000/- in 1963-64 and
Rs.20,000/- in the assessment year 196465 total Rs. 30,000/-.

4. In the accounts for the previous
year relevant to the assessment year 196667 and subsequent years they opened
another account in the books of the firm,
in addition to their original account. They
treated their original account as their
capital account (in which only the profit
was
credited)
and
the
accounts
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subsequently opened were treated as loan
accounts (in which interest was charged
from the firm). However, the entire
income by way of profit and interest from
the firm was assessed in the hands of the
two partners. Shri Ram Prasad in his
disclosure petition dated 9.8.1965 stated
that he was a partner in the firm M/s
Bhagwati Prasad Ram Sarup and that at
the time of his marriage he had received
substantial amounts from far and near
relations in the shape of silver coins,
which were kept with his wife and later
on sold for Rs.40,000/-. He stated that he
believed that this Rs.40,000/- was his
wife's exclusive property. He further
stated that with this amount he purchased
and sold bidis and the money earned from
bidi business was kept with his wife. He
added that although he had a bona fide
belief that this money was his wife's
exclusive property but since he had no
evidence to prove his claim, he was
offering a sum of Rs.76,062/- for
assessment. This amount was offered for
assessment in his own assessments in
which the income from the firm (which
was undoubtedly the joint family income)
was being assessed. This income was
offered for being assessed as joint family
income. Similarly Shri Ram Prasad
surrendered the deposits for assessment
alongwith his share income from the firm,
which was the income of the joint family.
Both the partners also got the interest on
these bank deposits assessed alongwith
the income of the joint family. In fact,
Shri Ram Swarup in his letter-dated
16.1.1965 (filed during the course of the
assessment for 1964-65) had stated that
the money deposited in the banks
represented the savings of his family.
Each of the two accounts of both the
partners in the books of the firm M/s
Bhagwati Prasad Ram Swarup were in
their own names. For the assessment year
1970-71, it was claimed that they were
partners in the firm representing their
respective HUFs. This contention of the
assessee was accepted by the Income tax
Officer. The assesseee further claimed
that the partners had two accounts, one in
the name of HUF and the other in the
name of individuals, and that the interest
paid to the two partners on their
individual
accounts
could
not
be
disallowed while computing the income
of the firm. The Income tax Officer
noticed that the assessee paid interest to
the two partners for the first time in the
assessment year 1970-71 amounting to
Rs.4,567/- in the account of the partner
Shri Ram Sarup and Rs.8,123/- in the
account of the partner Shri Ram Prasad.
The Income tax Officer further noticed
that the two partners showed all the assets
as usual in their wealth tax returns for the
assessment year 1969-70 and that it was
for the first time in the assessment year
1970-71 that an attempt was made to
describe a part of the investment in the
firm as individual. Considering the past
history of the assessee and the fact that
the two partners were showing these
assets in the wealth tax returns and also
the fact that no distinction was drawn at
any time to indicate that one account
represented the account of an individual
and the other account that of a joint
family, the Income tax Officer rejected
the assessee's claim. The Income tax
Officer further held that interest paid to
the two partners had to be added back
under clause (b) of Section 40 of the
Income tax Act, 1961 while computing
the income of the firm.

5. In appeal before the Appellate
Assistant Commissioner, the Appellate
Assistant
Commissioner
rejected
the
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claim on the ground that simply because
the assessments of the partners were made
for some time in the status of individuals,
the assessee could not claim that interest
was their indivudual income. On further
appeal before the appellate Tribunal, the
assessee took the stand that these two
partners
were
carrying
on
some
indivudual business and that they made
disclosure petitions, which were not
accepted, and the nature and source of the
deposits made by them were also not
explained.
Accepting
the
above
contention of the assessee, the Tribunal
observed that this showed that they were
having some other undisclosed sources of
income, but that certainly it was not from
the firm; that there could be no
presumption that in a joint Hindu Family
the business carried on by a coparcener
belonged to the family and that the
coparceners
could
carry
on
their
individual business as well. The Tribunal
further observed that there could be no
presumption that the other business,
which these persons were carrying on,
also belonged to the family. The tribunal
further observed that it was from the
assessment year 1966-67 that these two
partners opened their individual account
in the books of the firm and interest was
being paid on that account; that in the
assessment year 1968-69, though interest
was not paid, but that it did not mean that
interest was not payable on those
accounts. Observing that a karta is a
separate entity while the individual is
distinct from it, the Tribunal held that
keeping in view the two capacities the
payment of interest on the individual
account could not be disallowed. The
Tribunal, therefore, held that the amount
of interest paid in the individual accounts
of the two partners, ie. Rs.4,567/- to Shri
Ram Swarup and Rs.8,123/- to Shri Ram
Prasad were allowable deductions. In the
appeals filed by Shri Ram Swarup HUF
for the assessment year 1970-71 and by
Shri Ram Prasad HUF for the assessment
years
1969-1970
and
1970-71
the
Tribunal held that the interest income
could not be included in the assessments
of their respective HUFs.

6. Revenue, being aggrieved, moved
reference application before, the Tribunal,
which was not allowed. Thereafter, being
aggrieved,
reference
application
was
moved in this Court, where upon
following questions of law were framed :

1.
Whether on the facts and in the
circumstances of the case, the Tribunal
was legally justified in holding that the
interest paid to the assessee was not
includible in the hands of the firm under
section 40 (b) of the I.T. Act, 1961?

2.
whether on the facts and in the
circumstances of the case there was
material before the Tribunal to hold that
the two partners were carrying on some
individual business and having some
other undisclosed sources of income ?

7.

We
have
considered
the
submission of learned counsel for the
parties. The amounts of interest were
Rs.4,507/- in the account of Shri Ram
Swarup and Rs.8,123/- in the account of
Sri Ram Prasad. It was noted by Income
Tax Officer that the assessee paid interest
to the partners for the first time in the
assessment
year
1970-71.
In
the
immediate preceding assessment year the
status of the partners had been taken as
that of Hindu undivided family. For that
year both the partners showed all their
assets as usual in their wealth tax returns.
An attempt was made by the assessee to
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describe a part of the investments made in
the firm as being on individual account.
The Income tax Officer, relying on
Section 40, (b) of the Income tax Act,
1961 (hereinafter referred to as the "Act")
held that the allowance of payment by
way of interest, bonus, commission or
remuneration made by a firm to any of its
partners is not permissible and this is an
absolute prohibition. In the result, the
same was added back in the income of the
assessee. It appears that up to the
assessment year 1951-52 it was done in
the status of Hindu undivided family and
thereafter a partition took place in the
family and the firm was constituted. In the
assessment year 1952-53 the partition was
accepted. It was clearly recorded in the
findings of the Income tax Appellate
Tribunal referring to the final order of the
respective
Appellate
Assistant
Commissioner of Income tax.

8. It was submitted on behalf of the
Revenue that no evidence was adduced at
that time that the partner had any
individual business. On the basis of this
fact, the Tribunal held that no such
inference could be drawn that it was
Hindu undivided family account as no
withdrawals
were
made
except
for
personal expenses and as such the said
view
of
Appellate
Assistant
Commissioner of Income tax was not
accepted. Referring to the Income tax
Officer's order in the assessment year
1968-69 in the case of Shri Ram Prasad, it
was stated that no interest was charged on
individual accounts, which shows that this
account was treated as belonging to the
Hindu undivided family. According to the
departmental representative, it was an
important statement and was not rebutted
by any concrete evidence and as such this
account also belongs to the Hindu
undivided family and the interest has been
rightly disallowed. In fact, whatever
payment was made by way of interest or
salary would be a payment made to a
partner and cannot be allowed under
section 40 (b) of the Act. In this
connection, judgment and decisions in the
case of A.S.K. Rathnaswamy Nadar Firm
Vs. C.I.T. Reported in 1958 ITR 312 and
Girdharilal
Ghasiram
Vs.
C.I.T.
Reported in 1969 ITR 890 may be taken
note
of.
In
the
case
of
A.S.K.
Rathnaswamy Nadar Firm Vs. C.I.T.
(Supra) the Division Bench of Madras
High Court held that Section 10 (4)(b)
enacts an absolute prohibition, (which
corresponds to Section 40 (b) of the
Income Tax Act, 1961). It does not limit
the operation of the Act to remuneration,
paid to a partner as such, but includes
remuneration or salary paid to a partner in
any capacity. The assessee firm, which
paid a salary to one of its partners,
claimed that the salary should be deducted
in computing its income. It contended that
though the recipient of the salary
represented a joint family as the manager
thereof, in the partnership he worked in
his individual capacity for the firm for
which
remuneration
was
paid
and,
therefore, the provisions of section 10 (4)
(b) would not apply to the payment. In the
aforesaid dicision, it was also held that the
case was governed by Section 10 (4) (b)
and the salary paid was rightly added to
the profits and gains of the firm.

9. In Girdharilal Ghasiram Vs.
C.I.T. (Supra) the Division Bench of
Calcutta High Court held that the Karta of
a Hindu undivided family, receiving a
salary for services rendered to a firm,
became a partner of the firm and the firm
continued to pay a salary to him as before.
It was also held in the said decision that in
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whichever
capacity
the
karta
was
appointed as a partner of the assessee
firm, the remuneration paid to him could
not be claimed as a deduction, as he was
serving the firm for remuneration in his
capacity as partner.

In the aforesaid decision, it was also
held as thus;

"It is now well-settled that a Hindu
undivided family cannot, as such, enter
into a contract of partnership with
another person or persons. The karta of
the Hindu undivided family, however, may
and frequently does enter into partnership
with outsiders on behalf and for the
benefit of his joint family. But when he
does so, the other members of the family
do not, vis-à-vis the outsiders, become
partners in the firm. They cannot interfere
in the management of the firm or claim
any account of the partnership business
or exercise any of the rights of partners.
So far as outsiders are concerned, it is the
karta, who alone is, and is in law
recognized, as the partner. Whether in
entering into partnership with outsiders
the karta acted in his individual capacity
and for his own benefit, or he did so as
representing his joint family and its
benefit, is a question of fact. In the instant
case, there is no dispute that Prahladrai
entered into the partnership representing
his joint family and for the benefit of that
family. But although that is so, the
relationship between the partnership and
Prahladrai was that of a individual
appointed as a partner. The partnership
was not in any way concerned with the
fiduciary
relationship
in
which
Prahladrai stood with the family, which
he represented; Thus, the profit earned by
Prahladrai as a partner of the assesseefirm may become the income of the family
which he represented in the partnership
but that would not entitle the partnership
to claim remuneration paid to the partner
for services rendered as business
expenditure under section 10 (2) (xv) of
the Indian Income-tax Act. In the view
that we take, we find considerable support
from the observations of the Supreme
Court in Commissioner of Income tax
Vs. Kalu Babu Lal Chand.

Since we are of the opinion that, in
whichever capacity appointed as a
partner
of
the
assessee-firm,
the
remuneration paid to Prahladrai could
not be claimed as deduction, because he
was serving the firm for remuneration in
his capacity as partner, we answer the
question referred to this court in the
affirmative and in favour of the revenue.

10. On the basis of law, as existed
prior to the Explanations were added by
the Taxation Laws (Amendment) Act,
1984, the settled view was that Section 40
(b) of the Act absolutely prohibits the
allowances of any payment by way of
interest,
bonus,
commission
or
remuneration made by a firm to any of its
partners. The said view, however, has
under gone a sea change in the case of
M/s. Brij Mohan Das Laxman Das Vs.
Commissioner
of
Income-Tax,
Amritsar reported in JT 1997 (1) S.C.
115. The Supreme Court upheld the view
taken by Rajasthan High Court in the
case of Gajanand Poonam Chand Vs.
Commissioner of Income Tax (1984) 174
I.T.R. 346).

11. The question that arose before
the Supreme Court in the aforesaid
decision was as to whether interest paid to
a partner on the amounts deposited by
him in his individual capacity is hit by
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2 All] The Additional Commissioner of Income Tax V. Ram Prasad
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clause (b) where the partner is a partner
not in his individual capacity but as
representative of a Hindu undivided
family. The question, which had been
referred by the Tribunal the High Court
for its opinion, reads as follows:

"Whether the Tribunal was correct
in allowing the assessee's claim for
interest paid on the credit balance in the
individual account of Sri Rajendra
Kumar"

12. Section 40 (b) of the Act and
Explanations, which are relevant for the
purpose of determination of present
contraoversy read as under :

"40. Notwithstanding anything to
the contrary in sections 30 to 39, the
following amounts shall not be deducted
in computing the income chargeable
under the head 'Profit and gains of
business or profession',-

(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
had 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 representavive
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."

Explanations 1, 2, & 3 to Section 40
(b) of the Act, were added by the
Taxation Laws (Amendment) Act, 1984
with
effect
from
April
1,
1985.
Explanation 2 expressly provides that
where an indivudual is a partner in a firm
on behalf of or for the benefit of any other
person, any interest paid by the firm to
such individual otherwise than as partner
in representative capacity, shall not be
taken into account for the purpose of
clause (b).

13. The question, however, came up
before the Supreme Court if the benefit of
the
said
Explanations
could
apply
retrospectively and if the benefit could be
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 INDIAN LAW REPORTS ALLAHABAD SERIES [2002
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available prior to April 1, 1985. The
Supreme Court in this context held that
Taxation Laws (Amendment) Act, which
introduced the said Explanation, does not
say that the said Explanation shall have
effect
retrospectively.
However,
the
question is whether the said Explanation
is merely declaratory and clarificatory in
nature, in which case it will govern the
previous assessment years as well or
whether it is a substantial provision
having effect only prospectively. The
Supreme Court while dealing with the
said basic principle of partnership law in
paragraphs 6, 7, & 8 of the said judgment
which are set out as under, held thus:

"6. In Gajanand Poonam Chand V.
Commissioner of Income Tax {(1984)
174 I.T.R. 346}, the Rajasthan High Court
has taken the view that the said
Explanation is merely declaratory in
nature and that, therefore, even for the
assessment years prior to April 1, 1985,
the position of law should be understood
to be the same. In support of this
proposition, the High Court relied upon
the fact that ordinarily the purpose of an
Explanation is to clarify that which is
already enacted and not to introduce
something new. The High Court opined
that the Explanation was inserted by the
Parliament with a view to settle the
controversy as to the meaning and effect
of the said clause among the several High
Courts and that the Explanation puts a
seal of approval on the view taken by the
majority of the High Courts. The High
Court also referred to the definition of
"person" in clause (31) of Section 2. It
pointed out that the definition shows
clearly that an individual; a H.U.F. and a
firm are distinct persons/entities for the
purpose of the Income Tax Act. The High
Court, therefore, concluded that since an
individual and a H.U.F. are two distinct
entities for the purpose of the Act, clause
(b) of Section 40 has no application
where the interest is paid to the partner
on deposits made by him with the firm in
his individual capacity where such person
is a partner not in his individual capacity
but
as
representing
a
H.U.F.
Sri
G.C.Sharma, learned counsel for the
appellant-assessee, strongly relies upon
this decision and commends it for our
acceptance. Learned counsel points out
that even before the enctment of Taxation
Laws (Amendment) Act, 1984 (which
inserted Explanation 2 aforesaid), a
majority of the High Courts in the country
had taken the same view though a few
High Courts have no doubt taken a
contrary view. Looked at from any angle,
Sri Sharma says, the issue must be
answered in favour of the assessee.

7. Clause (b) of Section 40 is based upon
and is recognition of the basic nature of
relationship between a firm and its
partner. In Commissioner of Income Tax
vs Chidambaram Pillai (1977) 106 I.T.R.
292) this Court observed :

"Here the first thing that we must
grasp is that a firm is not a legal person
even though it has some attributes of
personality. Partnership is a certain
relation between persons, the product of
agreement to share the profits of a
business. 'Firm' is a collective noun, a
compendious expression to designate an
entity, not a person. In income tax law, a
firm is a unit of assessment, by special
provisions, but is not a full person which
leads to the next step that since a contract
of employment requires two distinct
persons viz. the employer and the
employee, there cannot be a contract of
the service, in strict law, between a firm
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2 All] The Additional Commissioner of Income Tax V. Ram Prasad
607
and one of its partners. So that any
agreement for remuneration of a partner
for taking part in the conduct of the
business must be regarded as portion of
the profits being made over as a reward
for the human capital brought in. Section
13 of the Partnership Act brings into
focus this basis of partnership business."

8.
This Court also quoted with approval
the passage from Lindley on the law of
Partnership to the effect:

"In point of law, a partner may be
the debtor or the creditor of his copartners, but he cannot be either debtor
or creditor of the firm of which he is
himself a member, nor can he be
employed by his firm, for a man cannot be
his own employer. "The provisions in
Chapters III and IV of the Partnership Act
amply define and delineate the duties,
obligations and rights of the partners visà-vis the firm. The question yet remains
where an individual is a partner in one
capacity, e.g., as a representative of
another person, can he have no other
capacity vis-à-vis the firm. To be more,
precise, does the above position of law
preclude an individual, who is a partner
representing a H.U.F., from depositing
his personal funds with the partnership
and
receiving
interest
thereon
<
Explanation 2 says in clear terms that
there is no such bar. This is the legislative
recognition of the theory of different
capacities an individual may hold(-) no
doubt confined to clause (b) of Section 40.
Once this is so, we see no reason to hold
that this theory of different capacities is
not valid or available for the period
anterior to April 1, 1985. Accordingly, we
hold that even for the period anterior to
April 1, 1985, any interest paid to a
partner, who is a partner representing his
H.U.F.,
on
the
deposit
of
his
personal/individual funds, does not fall
within the mischief of clause (b) of
Section 40. In this view of the matter, we
agree with the view taken by the
Rajasthan High Court in Gajanand
Poonam Chand that Explanation 2, in the
context of clause (b) of Section 40, is
declaratory in nature. Accordingly, we
allow this appeal, set aside the judgment
of the High Court and answer the
question referred under Section 256 in the
affirmative, i.e. in favour of the assessee
and against the Revenue.

14. Accordingly, it appears that the
Supreme Court in the case of M/S. Brij
Mohan Das Laxman Das (Supra) held
that even for the period anterior to April
1, 1985 any interest paid to a partner, who
is a partner representing his Hindu
undivided family on the deposit of his
personal/individual funds, does not fall
within the mischief of clause (b) of
Section 40 of the Act and agreed with the
view of Rajasthan High Court that
Explanation 2, in the context of clause (b)
of Section 40, is declaratory in nature.

15. In the case of M/S. Suwalal
Anandilal Jain Vs. Commissioner of
Income Tax, Bihar, Ranchi, reported in
AIR 1997 SC 1279, the Supreme Court
followed the same principle of law laid
down earlier in the case of M/S. Brij
Mohan Das Laxman Das (Supra).

16.

In
view
of
the
above
pronouncement of the Supreme Court, the
position of law is well settled and we do
not think that this question requires any
further elucidation. Accordingly, both the
questions are answered in affirmative, i.e.
in favour of the assessee and against the
Revenue.
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 INDIAN LAW REPORTS ALLAHABAD SERIES [2002
608
This
instant
Reference
stands
disposed of accordingly.
---------
APPELLATE JURISDICTION
CIVIL SIDE
DATED: ALLAHABAD AUGUST 21, 2002

BEFORE
THE HON'BLE S.K. SEN, C.J.
THE HON'BLE ASHOK BHUSHAN, J.

Special Appeal No. 726 of 1997

Union of India and others ...Appellants
Versus
No. 145432071-F Hav/Arm (Sub) Ram
Adhar Tiwari EME, Station Workshop,
New Cantt, Allahabad
 ...Respondent

Counsel for the Appellants:
Sri Shishir Kumar
Addl. S.C. Central Govt.

Counsel for the Respondent:
Sri G.D. Mukherji

Army Act, S-120(2) Summary Court-
martial-Shortage of Stock found in May
96-employee chargeshetted on 6.6.97 No
grave reason disclosed-allegation under
Section 52 (b) and 63- Summary court
martial can be held.

Held - Para 13

Section 52 (a) read with clause (b) as
extracted above, makes it clear that
theft or misappropriation of any property
will be an offence but any offence with
regard to property of a mess, band or
institution cannot be said to be an
offence
against,
the
Commanding
Officer. Section 120 (2) refers to offence
against the officer holding the court.
Officer has been defined in Section 3
(xviii). The definition of officer as given
in aforesaid provision refers to persons
commissioned, gazetted or in pay as an
officer in the regular Army. From the
facts of the present case, there is no
material to hold that the offence in
question can be said to be an offence
against the officer holding the court. We
find force in the submission of counsel
for the appellants that provisions of
Section 120 (b) were not attracted in the
facts of the present case and summary
court martial proceedings could have
been proceeded in the present case. In
view of the aforesaid discussion, the first
submission
of
the
counsel
for
the
appellants has substance.
Case law discussed:
J.T. 1993 (5) SC - 154
AIR 1999 SC- 1980
AIR 1998 SC-577
1986 UPL BEC-663
AIR 1993 SC-773
JT 1997 (4) SC 8

(Delivered by Hon'ble Ashok Bhushan,J.)

1. We have heard Sri Shishir Kumar,
counsel
for
appellants,
and
Sri
G.D.Mukherji, counsel appearing for the
respondent.

2. By this appeal, the appellants
have challenged the judgment of learned
Single Judge in Writ Petition No. 20405
of 1997 (Ram Adhar Tiwari Vs. the
Union of India & others). Learned Single
Judge
vide
judgment
dated
19th
August,1997 has allowed the writ petition
filed by the respondent setting aside the
order imposing sentence in the summary
court-martial dated 30th July,1997.

3. Brief facts giving rise to this
appeal are; respondent at the relevant time
was working as Havaldar in Corps of
Electrical and Mechanical Engineering
(E.M.E.) and was posted at Station
Workshop, Allahabad. The respondent
was detailed to look after the Canteen
Store Department (CSD) run by E.M.E.
Station Workshop. In the checking of
stock of canteen, at the time of handing