JUDGMENT
N.V. Balasubramanian, J.
1. In pursuance of the directions of this court in T. C. P. Nos. 232 and 233 of 1988, the Appellate Tribunal referred the following two questions of law for our consideration under Section 256(2) of the Income-tax Act, 1961 :
“1. Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was correct in law in holding that the order of assessment not disallowing under Section 40(b) the interest paid to the individual who is a partner representing the Hindu undivided family was not erroneous and prejudicial to the interest of the Revenue ?
2. Whether the Appellate Tribunal was correct in law in holding that the Explanations 2 and 3 to Section 40(b) introduced by the Taxation Laws
(Amendment) Act, 1984, which came into force on April 1, 1984, were clarificatory in nature ?”
2. Though the assessee was not served in the tax cases, we have decided to proceed with the disposal of the tax cases as the questions of law referred to us seem to be governed by the decision of the Supreme Court in favour of the assessee.
3. The assessee is a firm consisting of nine partners. Two of the partners, Sri Kishorilal Arora and Sri Chandra Kumar Arora, represented their joint families in the partnership firm. The capital was contributed by the two partners from the funds of the Hindu undivided family and no interest was payable thereon. The two partners had credit balance in their individual capacity in the accounts of the firm and the firm paid the interest on the credit balance of the following sums :
1981-82 1982-83
Sri Kishorilal Arora Rs. 35,975 Rs. 57,729
Sri Chandra Kumar Arora Rs. 7,500 Rs. 8,880
4. The assessee-firm did not deduct the interest paid to the two partners in their individual capacity on the ground that the real partners were only under the Hindu undivided family and not the individuals. The Income-tax Officer while completing the assessment for the assessment years 1981-82 and 1982-83 accepted the returns filed by the assessee, without disallowing the interest paid to the two individual partners.
5. The Commissioner of Income-tax exercised the powers of revision conferred on him under Section 263 of the Income-tax Act (hereinafter referred to as the Act). The Commissioner of Income-tax was of the view that the provision of Section 40(b) of the Act have not been applied by the Income-tax Officer to disallow the interest paid to the individual partners in computing the business income of the assessee. He, therefore, issued a show-cause notice to the assessee and after hearing the objections of the assessee, held that the provisions of Section 40(b) of the Act would apply and the amendment made to Section 40(b) of the Act by the Taxation Laws (Amendment) Act, 1984, with effect from April 1, 1985, has no application to two assessment years, namely, 1981-82 and 1982-83 and, therefore, he directed the Income-tax Officer to apply the provisions of Section 40(b) of the Act and to complete the assessment. The assessee appealed to the Tribunal against the orders passed by the Commissioner of Income-tax and contended that the provisions of Explanation to Section 40(b) of the Act were clarificatory in nature and applied to the assessment years in question. The Revenue contended otherwise. The Appellate Tribunal followed the decision of the Andhra Pradesh High Court in the case of N.T.R. Estate v. CIT [1986] 157 ITR 285 and held that the Explanation to Section 40(b) of the Act would apply retrospectively and cancelled the order of the Commissioner of Income-tax. On an application filed by the Revenue, this court directed the Tribunal to state a case and the Tribunal, accordingly, referred the questions of law set out supra.
6. Mr. C.V. Rajan, learned counsel for the Revenue fairly brought to our notice the decision of the Supreme Court in Brij Mohan Das Laxman Das v. CIT [1997] 223 ITR 825, wherein the Supreme Court held the Explanation 2 to Section 40(b) of the Income-tax Act, 1961, in the context of Clause (b) of Section 40, is declaratory in nature and would apply even for periods anterior to April 1, 1985. The above view of the Supreme Court was reiterated by the Supreme Court in the case of Suwalal Anandilal Jain v. CIT [1997] 224 ITR 753. He also brought to the notice of this court in the case of Rashik Lal and Co. v. CIT [1998] 229 ITR 458, wherein the Supreme Court doubted the earlier decisions in Brij Mohan Das Laxman Das v. CIT [1997] 223 ITR 825 and Suwalal Anandilal Jain v. CIT [1997] 224 ITR 753.
7. We have carefully considered the submissions made by learned counsel for the Revenue. It is clear that the Supreme Court in Brij Mohan Das Laxman Das v. CIT [1997] 223 ITR 825, has clearly held that Explanation 2 to Section 40(b) of the Act is declaratory in nature and it will apply even for the period prior to the period April 1, 1985. The above decision was followed in Suwalal Anandilal Jain’s case [1997] 224 ITR 753. The Supreme Court therein held that where a person is a partner in the firm as a karta representing the Hindu undivided family, interest paid to him by the firm on deposits made by him with the firm in his individual capacity, is deductible, while computing the income of the firm chargeable under the head “Profits and gains of business or profession” even for periods prior to April 1, 1985, Though the above decision was doubted by the Supreme Court in Rashik Lal and Co. v. CIT [1998] 229 ITR 458, we are of the view that there is no infirmity in the order of the Appellate Tribunal that the interest paid to the partner in his individual capacity on the deposits made by him is deductible in computing the profits and gains of business of the firm. Though the earlier two decisions were doubted by the Supreme Court in Rashik Lal and Co. v. CIT [1998] 229 ITR 458, it is seen that the Supreme Court was dealing with the case of commission paid to the partner in that case. But in the other two decisions, the Supreme Court dealt with the payment of interest. Since in the earlier two decisions, namely, Brij Mohan Das Laxman Das v. CIT [1997] 223 ITR 825 (SC) and Suwalal Anandilal Jain’s case , where the Supreme Court dealt with the case of interest directly paid to the partner in his individual capacity, we are of the view that the earlier two decisions of the apex court, will apply to the facts of the case. Accordingly, following the two decisions of the Supreme Court in Brij Mohan Das Laxman Das v. CIT [1997] 223 ITR 825 and Suwalal Anandilal Jain’s case [1997] 224 ITR 753, we answer both the questions of law referred to us in the affirmative and against the Department.