1939 (3) TMI 12 - HC - Income Tax

Valid Partnership under Indian Contract Act; Business Losses Allowed, Interest on Advances Disallowed

Chandrika Prasad Ram Swarup Versus Commissioner of Income-tax

Chandrika Prasad Ram Swarup Versus Commissioner of Income-tax - [1939] 7 ITR 269 Issues Involved:1. Validity of the partnership between Chandrika Prasad Ram Swarup and Bulaqi Das Ramgopal.2. Treatment of losses sustained by the assessee firm in another partnership.3. Consideration of interest paid to a partner in the assessment year.Detailed Analysis:1. Validity of the Partnership:The first issue was whether the partnership between Chandrika Prasad Ram Swarup and Bulaqi Das Ramgopal was valid in law under the Indian Contract Act, 1872. It was agreed that the case was governed by the Indian Contract Act and not the Partnership Act of 1932. The court noted that a firm is not a legal entity but merely a collective name for the individuals who are members of the partnership. Therefore, a firm as such cannot be a partner in another firm. However, the court held that the individual members of a firm could enter into a partnership with other individuals or with the partnership of another firm. The partnership was deemed valid as it was essentially an agreement between the individual partners of the two firms. The court stated, 'The partnership referred to in question No. (1) was, therefore, a partnership between the partners of the assessee firm and the partners of Bulaqi Das Ramgopal and was valid in law.' Thus, the answer to the first question was in the affirmative.2. Treatment of Losses:The second issue was whether the losses sustained by the assessee firm in its partnership with Bulaqi Das Ramgopal could be treated as losses suffered in the course of business and allowed in the course of assessment. The court held that if the partnership was valid, the losses must be treated as the losses suffered by the assessee firm. Even if the partnership was illegal, the losses incurred by the assessee firm had to be taken into account in computing its income for the year. The court emphasized that the legality or illegality of transactions was irrelevant in calculating the net profits or losses of a firm. The court stated, 'The income assessable to tax is the actual income of an individual or of a firm irrespective of the manner in which the income was derived.' Therefore, the answer to the second question was in the negative, meaning the losses should be treated as losses suffered in the course of business by the assessee firm.3. Consideration of Interest Paid:The third issue was whether the sum of Rs. 51,000 interest paid to Bihari Lal Ram Charan in the 'previous year' could be taken into consideration in the assessment year. The court held that since the partners of Behari Lal Ram Charan, and not the firm itself, were the partners of the assessee firm, the advances made could not be regarded as loans to the assessee firm. Therefore, the interest paid could not be taken into account in the assessment. The court stated, 'The answer to question No. (3) must, therefore, be in the negative.'Conclusion:The court concluded that the partnership between Chandrika Prasad Ram Swarup and Bulaqi Das Ramgopal was valid. The losses sustained by the assessee firm in the partnership were to be treated as losses suffered in the course of business and allowed in the assessment. However, the interest paid to Bihari Lal Ram Charan could not be considered in the assessment year. The final answers were:1. Affirmative for the first question.2. Negative for the second question (losses should be treated as business losses).3. Negative for the third question.