MILAPCHAND R SHAH Vs. COMMISSIONER OF INCOME TAX

JUDGEMENT

(1.) M .R. Shah and P.R. Shah are the two partners in the firm of Roopchand Chabildass and Sons. The firm was carrying on a business in the manufacture and sale of wheat and gram products, besides doing money -lending business. In the Samvat year 2010, the flour mills business of the firm was transferred to a limited company. Each partner invested in the shares of this company, and for the purpose of doing so, they were financed through their drawings account with the firm. The firm had made heavy borrowings upon which it had paid interest in the Samvat years 2011 and 2012. Its borrowings during these two years amounted Rs. 12,50,000 and Rs. 11,00,000 roughly. During these years, P.R. Shah had taken advances to the tune of Rs. 3,30,000 and Rs. 4,26,000 and odd, and M.R. Shah had similarly taken advances of Rs. 1,50,000 and Rs. 2,50,000 roughly. In addition to this, the firm had also paid income -tax on behalf of the partners. In the course of the assessment proceedings of the firm for the year 1957 -58 the relevant account year being the Samvat year 2012, between 15th Nov., 1955 and 2nd Nov., 1956, it was found that while the firm had paid interest of nearly a lakh of rupees on the amounts borrowed by it, it had not charged interest on the accounts of the partners to whom it had advanced the moneys. Equally, the firm had made advances to another firm known as the Sangli firm to the tune of Rs. 1,28,000 and odd, upon which also it had not purported to recover any interest. In explanation of the situation, the firm stated that the advances to the Sangli firm were in the course of the business, and that the amounts drawn by the two partners from the drawing account were invested by them in the acquisition of shares, properties, etc., the income from which was subjected to tax in their hands. It was further claimed that the income -tax advances to the two partners could not be treated as personal drawings. But, what this explanation really meant is not quite clear. Now, it appears that the two partners were also partners in the Sangli firm. The Sangli firm was wound up in 1948. The ITO held that in so far as the advances to the partners were concerned, it could not be said that the firm had advanced monies for the purpose of its business. Equally, the payment of the income - tax liabilities of the partners out of the assets of the firm was debitable only to the personal accounts of the partners, and such payments could not be said to be in the course of the business of the firm. He however, took the view that since 75% of the borrowing of the firm were so locked up in advances, which did not represent a business activity of the firm, only proportionate interest on the borrowals of the firm could be allowed. Accordingly, as against Rs. 95,300 claimed as interest payments on borrowed capital in the assessment of the firm, he disallowed a sum of Rs. 71,500.

(2.) THE two partners in their individual assessments claimed that if the interest payment by the firm was disallowed to any extent, since the moneys withdrawn had been used for the purpose of investment in shares and properties, the income from which was being assessed to tax in the hands of the individual partners, the interest on such amounts as were taken from the firm by the partners should be allowed in their assessments. This contention was shortly met by the ITO by pointing out that even assuming that the advances taken from the firm represented borrowed capital and had been invested by the partners in the manner indicated, the individual assessee would be entitled to allowance only if he had paid interest on the borrowed capital. That not being the case, no question of allowance under this head arose.

(3.) APPLICATIONS by the firm and the two individual partners under S. 66(1) of the Act being rejected, this Court directed the Tribunal to state a case under S. 66(2) of the Act and accordingly the following questions stand referred to us :