1960 PLP 1362 (PTD)

CHANDRA, REDDY, C J.‑The assessee is a partner in a regis tered firm, known as Messrs Navayuga Films, Vijayawada, 3‑16th share of the profits in this firm for the assessment year 1956‑57, was computed at Rs. 40,

927. In order to invest his share of the capital, the assessee borrowed money from third parties and he had to pay an interest of Rs. 5,099 on such borrowed money. In the return he submitted, he inter alia claimed a deduction of this sum. This was disallowed by the assessing authority on the ground that the assessee's net income was ascertained with reference to section 23 (5) (a) and section 23 (6) of Income‑tax Act and, as such, it is not a justifiable deduction. The basis of this opinion was an unreported judgment of the Calcutta High Court in Iswardas Subhakaran v, Commissioner of Income‑tax (Income‑tax Referred Case No. 38 of 1952 of the High Court of Calcutta). The appeal of the assessee to the Appellate Assistant Commis sioner was dismissed but his further appeal to the Income‑tax Appellate Tribunal proved successful. By an application, the Commissioner of Income‑tax, who was aggrieved by this order, required the Tribunal to refer to the High Court, the question of law, namely, whether the assessee was entitled to claim a deduction of Rs. 5,099 under sec tion 10 (2) (iii) in computing the assessee's share in the profits of the firm known as Messrs Navayuga Films. The Tribunal com plied with this request under section 66 (1) of the Indian Income tax Act. The principal point for consideration is whether section 23 (5) precludes such a deduction being allowed and whether section 10 (2) (iii) of the Income‑tax Act is applicable to the income of a partner of a firm. In order to appreciate the point involved in this reference, it is useful to read the relevant section of the Act. Section 23 (5) (a), which provides the basis for the determination of the profits of a partnership as also the distribution thereof amongst the various partners, in so far as it is relevant for this enquiry, recites: `Notwithstanding anything contained in the foregoing sub sections, when the assessee. is a firm and the total income of the firm has been assessed under subsection (I), subsection (3) or subsection (4), as the case may be,‑ (a) in the case of a registered firm. (i) the income‑tax payable by the firm itself shall be deter mined ; and (ii) the total income of each partner of the firm, including therein his share of its income, profits and gains of the previous year, shall be assessed and the sum payable by him on the basis of such assessment shall be determined: Provided that if such share of any partner is a loss it shall be set off against his other income or carried forward and set off in accordance with the provisions of section 24." Section 10, omitting again the portions not relevant for our purpose, reads "(1) The tax shall be payable by an assessee under the head `Profits and gains of the business, profession or vocation' in respect of the profits and gains of any business, profession or vocation carried on by him. (2) Such profits or gains, shall be computed after making the following allowances, namely:‑ (iii) in respect of capital borrowed for the purposes of the business, profession or vocation, the amount of the interest paid." Section 16, omitting again the immaterial portion, reads: "(1) In computing the total income of an assessee‑ (b) when the assessee is a partner of a firm, then, whether the firm has made a profit or a loss, his share (whether a net profit or a net loss) shall be taken to be any salary, interest, commission or other remuneration payable to him by the firm in respect of the previous year increased or decreased respectively by his share in the balance of the profit or loss of the firm after the deduction of any interest, salary, commission or other remuneration payable to any partner in respect of the previous year: Provided that if his share so computed is a loss, such loss may be set off or carried forward and set off in accordance with the provisions of section 24." It is plain from section 23 (5) (a) that all that is contemplated by it is that a registered firm as such is not liable to be taxed on the profits earned by it but the income of the individual partners is to be assessed. The profits are not taxed at the source but they become taxable in the hands of each of the partners. Under that very provision, the income exigible to tax is not merely that received from the firm by way of profits but the total income of each of the partners. Therefore the argument that when once the net income of several of the partners from the firm is ascertained that should form the basis of assessment, loses much of its force. The computation of income for taxing purposes takes in the income of the partners from other sources also. For instance, any additional payment a partner might get in the shape of salary, commission or other remuneration envisaged in section 16, is to be taken into account in determining the assessable income of the partner. To calculate a man's total income, the necessary expenditure to be incurred by him for the purpose of earning that income could not be ignored. The proviso to section 23 (5) (a) also furnishes a clue to the interpretation of the section, namely, that the loss incurred by a partner should be set off against his other income. Thus, it is clear 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. Surely, in order to invest money in partnership, if a partner has to borrow money, he has necessarily to pay interest thereon and that could not be left out of account. In our opinion, the real taxable income of a partner is what he receives from the partner ship and other sources minus what he has to expend in order to gain it. It is this principle that is embodied in section 10 of the Income‑tax Act. The argument advanced by Sri Kondaiah for the Department is that the deductions permissible under section 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 a partner. We do not think that we can give effect to this proposi tion. Surely, the business of a firm is the business of each of the partners. A firm as such is not a juristic entity. It is only an association of persons carrying on a business jointly. As has been repeatedly pointed out, it is a compendious name for some persons carrying on the business jointly. It is, therefore, futile to contend that section 10 is inapplicable to the income a partner receives from a registered firm. This section permits a deduction in regard to interest payable by a partner on the capital borrowed by him. In this connection, we may cite the pronouncement of the Privy Council in Commissioner of Income‑tax v. Chitnavis ((1932) 2 Comp. Cas. 464), where the question that presented itself was whether a bad debt was admissible in deduction at a time when there was no provision in section 10 (2) with regard to bad debts. In answering it in the affirmative, their Lordships observed as follows: "Although the Act nowhere in terms authorises the deduction of bad debts of a business, such a deduction is necessarily allowable. What are chargeable to income‑tax in respect of a business are the profits and gains of a year ; and in assessing the amount of the profits and gains of a year account must necessarily be taken of all losses incurred, otherwise you would not arrive at the true profits and gains." The remarks of their Lordships apply with full vigour to a casa like this. Similar is the opinion expressed by Chagla, C. J., and Tendolkar, J., in Shantikumar Narottan Morarji v. Commis sioner of Income‑tax ((1955) 27 I T R 69). This view is also shared by a Bench of the erstwhile Hydera bad High Court in Mool Chand v. Commissioner of Income‑tax ((1956) 29 I T R 449). For these reasons, we hold that the interest which a partner is obliged to pay on the amount borrowed by him for the purpose of making an investment in the firm is an allowable deduction. For the same reasons, we express our respectful dissent from the view of the Calcutta High Court in Iswardas Subhakaran v. Commissioner of Income‑tax (Income‑tax Reference Case No. 38 of 1952 of the High Court of Calcutta) that : "the profits which have come to the assessee from the partnership firm have come as net profits and after they have so come, there cannot be any further deduction on account of expenditure incurred not even by the firm but by the partner who received the share or incurred on any account whatsoever." It is also pertinent to remark that the learned Judges have not considered this aspect of the matter in the light of the several relevant sections of the enactment. It was the result of a concession made by the counsel appearing for the assessee. In the result, we maintain the order of the Income‑tax Appellate Tribunal and answer the question referred to us in the affirmative. The assessee will have his costs. Advocate's fee is fixed at Rs.

250. Question answered in the affirmative.