COMMISSIONER OF INCOME TAX Vs. VEERIAH REDDIAR
HIGH COURT OF KERALA
COMMISSIONER OF INCOME-TAX
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(1.) This is a Reference under S.66 (2) of the Income Tax Act, 1922. The assessment year concerned is 1959-60; and the accounting period 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, Shri 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. Previously the firm had business in Bombay also which was mainly for purchasing goods there for the trade at Alleppey. The business at Bombay was found to be a losing concern. By an agreement entered into between the partners on 15-7-1957 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 despatched by the Bombay business to customers amounted to Rs. 48,03,862/. Out of it a portion represented value of goods despatched to the assessee at Alleppy. The Bombay business received a commission altogether of Rs. 25,374-95 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 for 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 locked to all the partners of the assessee firm and not only Veeriah Reddiar for repayment 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."
(3.) The material part of S.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 its partners was not a permissible deduction, runs thus:
"Nothing in ... clause (XV) of sub-s.(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."
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.;
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