IQBAL AHMAD, J. - (1.) THIS is a reference under Section 66(3) of the Income -tax Act (Act No. XI of 1922) by the Commissioner of Income -tax in accordance with the order of this Court passed on an application filed by firm Chandrika Prasad Ram Swarup hereinafter referred to as the assessee firm and the questions of law that fall to be decided are as follows : - (1) Whether the partnership between Chandrika Prasad Ram Swarup and Bulaqi Das Ramgopal was a valid partnership in law in view of the provisions of the Partnership Act of 1932. (2) Whether the assessee firm in its corporate capacity being in point of fact a partner in another firm and having as such invested its funds in such partnership and having sustained losses by reason of such partnership, such losses cannot in law be treated as the losses suffered in the course of business by the assessee -firm, and whether such losses cannot be allowed in the course of assessment. (3) Whether the sum of Rs. 51,000 interest paid to Bihari Lal Ram Charan in the previous year can, in law and in view of the assessees account books, be taken into consideration in the assessment year.
(2.) IT is agreed on all hands that the present case is governed not by the provisions of the Indian Partnership Act of 1932 but by the Indian Contract Act and reference to the Partnership Act in question No. (1) is, therefore, erroneous. The facts that led to the reference are as follows : - The assessee firm carries on cloth business in the city of Cawnpore and its partners are : - Extent of share. (1) Messrs. Behari Lal Ram Charan ..... 7/16. (2) Chandrika Prasad Ram Swarup ..... 4/16. (3) Mullan Dalal ..... 4/16. (4) Mutsaddi Lal ..... 1/16. It is stated in the reference that the first partner, Messrs. Behari Lal Ram Charan, is a firm and is the principal financier of the assessee firm. The assessee firm is a partner and owns a six annas share in another firm known as Bulaqi Das Ram Gopal, which firm also carries on cloth business. In response to a notice issued by the Income -tax Officer the assessee firm submitted a return for the assessment year 1933 -34 showing a loss of Rs. 24,208 -4 -0. It is not disputed that the firm Bulaqi Das Ramgopal incurred heavy losses and the proportionate loss debited to the assessee firm in the accounting year ("previous year") was Rs. 48,546. The assessee firm however made profits in the cloth business carried on by it with the result that the total loss incurred by the assessee firm in the accounting year was Rs. 24,208 -4 -0. In computing its income for the year under consideration the assessee firm claimed exemption from liability to pay income -tax with respect to certain items. The Income -tax Officer however disallowed items amounting to Rs. 6,994 and further relying on the decision to make into account the loss incurred by the assessee firm in the business of Bulaqi Das Ramgopal on the ground that a firm cannot legally be a partner in another firm. In the result the Income -tax Officer made the assessment on an income of Rs. 31,331.
(3.) THE assessee firm appealed to the Assistant Commissioner of Income -tax who with a slight modification, which is immaterial for the decision of the present reference, sustained the assessment made by the Income -tax Officer. In appeal before the Assistant Commissioner the assessee firm put forward an argument in the alternative claiming allowance for a further sum of Rs. 51,090 on the allegation that this amount was this amount was paid by it to one of its partners, viz., to the firm Messrs. Behari Lal Ram Charan, on account of interest on the advance made to the assessee firm. It was stated before the Assistant Commissioner of Income -tax that this item of interest was not claimed in the course of assessment before the Income -tax Officer, as interest paid to Behari Lal Ram Charan in previous years was not allowed on the ground that advances made by a partner cannot be treated as a loan to the firm, and it was contended that, if as a matter of law one firm cannot be a partner with another firm, Messrs. Behari Lal Ram Charan being a firm cannot be legally held to be a partner of the assessee firm, and, as such, the interest paid to Behari Lal Ram Charan by the assessee firm should be taken into account in making the assessment. This argument for certain reasons, which it is unnecessary to state, was rejected by the Assistant Commissioner. Thereafter two applications, one for review under Section 33 and the other for statement of case to the High Court under Section 66(2) of the Income -tax Act, were made by the assessee firm to the Commissioner of Income -tax who rejected both the applications. Then on May 4, 1936, the assessee firm applied to this Court under Section 66(3) of the Act praying that the Commissioner be called upon to state the case. This application was allowed by this Court with the result that the present reference has been made by the Income -tax Commissioner. ;