DEVI CINE PROJECTOR MANUFACTURING CO., ETC. ETC. vs. COMMISSIONER OF INCOME TAX

CIVIL APPEAL No. 1185/1990Supreme Court[1990] 1 S.C.R. 26805 February 1990Bench: 3 JudgesAuthor: M.N. VENKATACHALIAH, N.D. OJHA, J.S. VERMA DEVI CINE PROJECTOR MANUFACTURING CO., ETC. ETC.4 pages
AI SummaryRemanded

What were the facts?

The assessee, Devi Cine Projector Manufacturing Co., etc., filed Special Leave Petitions before the Supreme Court against the Madras High Court's rejection of their applications under Section 256(2) of the Income Tax Act, 1961. The Income Tax Appellate Tribunal (Tribunal) had held that the entirety of interest paid by a firm to its partner was disallowable under Section 40(b) without considering interest paid by the partner to the firm. The Tribunal declined to state a case to the High Court. The High Court rejected the assessees' applications, relying on its earlier decision in C.I.T. v. O.M.S.S. Sankaralinga Nadar & Co. The appeals before the Supreme Court were directed against the High Court's orders. The amount in dispute is the extent of disallowance of interest under Section 40(b). The procedural history involves appeals to the Tribunal, applications to the Tribunal to state a case, applications to the High Court under Section 256(2), and finally Special Leave Petitions to the Supreme Court.

What did the Supreme Court hold?

The Supreme Court held that the position on the point of law is now settled by its pronouncement in Keshavji Ravji & Co. v. C.I.T., [1990] 1 S.C.R. 243. The Court ruled that where two or more transactions on which interest is paid to or received from the partner by the firm have the element of mutuality and are referable to the funds of the partnership, Section 40(b) should not be construed to exclude the quantification of interest paid to a partner by the firm in excess of what was received from the partner. Consequently, the High Court's decision in C.I.T. v. O.M.S.S. Sankaralinga Nadar & Co. was overruled. The Supreme Court treated the Special Leave Petitions as directed against the main appellate orders of the Tribunal and remitted the cases to the Tribunal for fresh disposal on the extent of disallowance of interest under Section 40(b) in light of the pronouncement in Keshavji Ravji & Co. The operative direction was to set aside the orders of the Tribunal and the High Court and remand the appeals to the Tribunal for fresh disposal.

What were the issues?

1. Whether the disallowance of interest paid by a firm to its partner under Section 40(b) of the Income Tax Act, 1961, should be confined to the net amount after setting off the interest paid by the partner to the firm on borrowings from the firm, or whether the entirety of the interest paid by the firm to the partner is disallowable. Assessee's contentions: The assessee argued that the interest paid by the firm to the partner should be considered on a net basis, after accounting for the interest paid by the partner to the firm. They relied on the principle of mutuality in transactions between a firm and its partners. Revenue's contentions: The Revenue contended, as upheld by the Tribunal, that the entirety of interest paid by the firm to the partner was disallowable under Section 40(b), irrespective of any interest paid by the partner to the firm. The Revenue relied on the High Court's decision in C.I.T. v. O.M.S.S. Sankaralinga Nadar & Co., 147 ITR 332.

Which sections of the Income-tax Act were involved?

Section 40(b),Section 256(1),Section 256(2)

AI-generated summary — verify with the full judgment below

A DEVI CINE PROJECTOR MANUFACTURING CO., ETC. ETC. ).. v. . COMMISSIONER OF INCOME TAX 13 FEBRUARY 5, 1990 [M.N. VENKATACHALIAH, N.D. OJHA AND .. J.S. VERMA, JJ.] Income Tax Act, 1961: Section 40(b)-Disallowance of interest- Firm paying interest to partner-Partner also paying interest to firm on c borrowing from firm-Whether such interest to be confined only to net amount after setting off interest paid by partner.

Constitution of Lndia, 1950: Article lJ(r-Special Leave Petitions ~ filed against High Court's rejection of assessee's applications under Sec- lion 256(2) of the Income Tax Act, 1961-/n view of settled position on D point of law involved and to avoid time consuming procedure, Special Leave Petitions treated as arising out of appellate orders of Tribunal and matter remitted to Tribunal for disposal afresh in the light of pro- nouncement of Court. )

The Income Tax Appellate Tribunal in appeals preferred before it E by the revenue held that the entirety of interest paid by a firm to its partner was cmatlowable under Section 40(b) of the Income Tax Act without reference to the interest that might, in turn, have been paid by the partner to the firm

The order continues below.

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