Decided on October 21,1982



S. Rajaratnam, Accountant Member - (1.) THIS is an appeal filed by Smt. Maganti Ushadevi of Warangal against the order of the AAC confirming disallowances of the expenses amounting to Rs. 7,521 as a deduction, from the share income, in the assessment for the assessment year 1977-78.
(2.) The assessee is an individual and derives her share income from Rama Talkies, Warangal and Rama Transport, Bellampalli. In the latter firm, she had 30 per cent interest. The assessee purchased two lorries and did not ply them herself, but handed them over to Rama Transport for its business. However, she paid two amounts of Rs. 5,260 as insurance and Rs. 2,251 as permit expenses and also paid taxes on the same. The asses-see caimed these expenses against the share income from the firm. Since she did not ply these lorrjes herself, in the view of the ITO, these expenses could not be allowed in her individual assessment. This view was confirmed by the first appellate authority. The learned representative for the assessee relied on a commentary of Sampath Iyanger, for the view that what is allowed against the share income is not necessarily limited to interest on borrowed capital. He also cited the authorities referred therein. The learned departmental representative claimed that these expenses could be allowed, if at all, only in the firm's case. He further claimed that consistent with past records, it cannot be allowed in the assessee's case. He sought to buttress the revenue's case by adding one more legal point by suggesting that it was, at any rate, a capital expenditure.
(3.) WE have carefully considered the records as well as the arguments. WE must admit that there is absolutely no case for holding that the expenditure is of a capital nature, as the expenditure on licence and insurance would be a revenue expenditure. No doubt, such an expenditure would ordinarily have been claimed by the firm. However, it is not disputed that the firm has not claimed the same. In fact, it could not be so claimed by the firm because it did not meet the expenditure. It was the assessee who met the expenditure. The assessee received income from these lorries not by plying them herself, but by using them in the partnership. It, therefore, stands to reason that the expenditure incurred has a direct nexus with the share income. It was settled under the relevant provisions of the 1922 Act, that the share income being assessable as business income was entitled to be treated as such and that all expenses relatable thereto, as long as these were wholly and exclusively for the purpose of earning the share of profit were deductible. It was held so by the Supreme Court in the case of CIT v. Ramniklal Kothari [1969] 74 ITR 57. There are two departures in the 1961 Act. The first departure is that the partners' share income is now assessable under several heads, in the same proportion as the classification in the hands of the firm. The second departure is that it is specifically enacted that the partner would be entitled to deduction of interest on capital borrowed, for the purposes of investment in the firm. There is, therefore, no scope for the revenue's argument that the decision of the Supreme Court in Kothar's case {supra) under the 1922 Act may not apply now. There is further scope for the argument that only interest on capital borrowed is to be allowed against such share income. The matter has now been resolved by a number of decisions under the 1961 Act also. The Rajasthan High Court in CIT v. Jabarmal Dugar [1972] 84 ITR 158 agreed with the commentary in Kanga & Palkhivala's Law and Practice of Income-tax, by reproducing the following passage at page 498 of the 5th edition, in reference to Section 37(1), in relation to Section 67(3) of the Income-tax Act, 1961 : The Legislature did not want to make Sub-section (3) of Section 67 exhaustive. If deduction could be claimed according to law under any other provision of the Act, that right would not be taken away merely by the provisions of Sub-section (3) of Section 67. Hence, the natural rule of harmonious construction, which requires full effect to be given both to Section 37(1) and Section 67(3) of the Act will prevail and the asscssec would be entitled to claim the deduction permitted by Sub-section (1) of Section 37, provided the facts necessary for such claim have been stated and found in his favour.'(p. 161) The High Court in this case was dealing with the claim of remuneration to staff employed by a partner at his residence for the affairs of the firm. The Delhi High Court in CIT v. Ganpat Rai Jaggi & Co. [1972] 86 ITR 363 dealt with a case of remuneration paid to the manager of the partnership business out of the profits of one of the partners and claimed as a deduction in that partner's case. With reference to the provisions of the Act, the High Court came to the conclusion that the liability in this case related to the partner and that there was nothing in Section 67(3) which deals with the allowance of interest on borrowed capital against share income to exclude the operation of Section 37. According to the High Court, the authorisation of interest on borrowed capital under Section 67 does not justify the departure from the rule laid down by the Supreme Court in Ramniklal's case (supra) under the 1922 Act. The Bombay High Court in the case of M.G. Bhatt v. CIT [1980] 123 ITR 931 was dealing with a case of a partner paying remuneration, to look after his duties as a partner in the firm of architects and civil engineers. Such remuneration was a percentage of his share of profit. This was found to be deductible in the assessment for the assessment year 1962-63 to which year the 1961 Act applied. Since various High Courts have taken the view that the principle laid down by the Supreme Court in the case of Ramniklal (supra) in the context of the provisions of the 1922 Act, continued to apply also to the provisions ot the 1961 Act, we are of the view that the assessee should succeed as the payment by the assessee-partner is wholly and exclusively necessary for enabling use of the lorries as a partnership asset and that such expenses should, therefore, be allowed against the share income.;

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