ALLADI KUPPUSWAMI, J. -
(1.) : 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 1/2 per cent share and the minor son holds another 37 1/2 per cent 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 ITO disallowed the claim. An appeal to the AAC was dismissed. On further appeal, the 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 CIT 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 ?"
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 IT Act, 1961.
The depreciation is claimed under S. 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 S. 37, under which any expenditure (not being the expenditure of the nature described in ss. 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 IT Act of 1922 were ss. 10(2)(vi) and 10(2)(xv), respectively.
In CIT vs. Parvathaneni Chandrasekhara Rao (1960) 40 ITR 195 (AP), it was held that a partner of a registered firm is entitled to claim under S. 10(2)(iii) of the IT 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 S. 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 CIT vs. Ramniklal Kothari (1964) 54 ITR 232 (Pat), 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 S.10(2)(xv) of the IT Act or under the general principles.
(3.) 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 IT Act, 1922, but he submitted that the position under the Act of 1961 is different. Though the latter Act contains provisions similar to ss. 10(2)(vi) and 10(2)(xv) of the INdian IT Act, 1922, there is a special provision, namely, S. 67, which deals with the method of computing a partner's share in the income of the firm. Under S. 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 ss. 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. vs. Secretary, Board of Revenue AIR 1964 SC 207 : (1964) 15 STC 74 and Subhodchandra Popatlal vs. CIT and EPT (1953) 24 ITR 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 ss. 30 to 37 to the case of a partner's share in the income from the firm. It is true, S. 67 refers to the method of computing a partner's share and S. 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 ss. 30 to 37 are not permissible in the case of a partner's share in the income of the firm.
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 IT Act of 1922, the clause corresponding to S. 67(3) was cl. 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.";