1. We find it convenient to dispose of these three appeals together since the issue to be decided is the same, viz., whether the assessee is entitled to deduction under Section 80V of the Income-tax Act, 1961 ('the Act') of the interest debited to his account in the books of the firm in which he is a partner.
2. The assessee is an individual. He was a partner in the firm M.C.Ghia & Co. His personal account in the firm has been treated somewhat like a current account. His income receipts are credited in that account. So too his drawings and payment of taxes. The partnership deed did not stipulate that partners would be debited with interest.
Nevertheless, interest has been charged on the debit balances. The accounting years are the financial years. For the year ending 31-3-1976, summary of the account shows :Balance brought forward 16,32,856 Deposits 85,693Withdrawals 1,79,535 Share of profit 28,311Interest 1,47,257 3. For the other two accounting years also, the position was the same.
There was debit balance to which interest was debited. For the year ended 31-3-1977, interest debited was Rs. 1,04,852 and for the year ended 31-3-1978 interest was Rs. 1,16,886. Part of the brought forward debit balance was said to be the withdrawals made on account of the payment of his personal income-tax over the years.
4. For the assessment years 1976-77 and 1977-78, the assessee did not make any claim for deduction under Section 80V before the ITO. However, he moved a revision petition under Section 264 of the Act. The Commissioner by his order dated 3-9-1979 set aside the assessments and directed the ITO to allow the deduction after verifying the assessee's claim and in accordance with law. In the assessment for 1978-79, the claim was made before the ITO himself.
5. For the assessment year 1976-77t the ITO held that under Section 80V only borrowals made for payment of taxes after 1-4-1976 would be eligible for deduction. Calculating the interest at the rate of 9 per cent he allowed a deduction of Rs. 2,085.
6. For the assessment year 1977-78, he found that nothing was drawn from the firm for payment of taxes. Therefore, nothing is allowable under Section 80V.7. For the assessment year 1978-79, he found the position to be the same as 1977-78 and there were no specific withdrawals for payment of taxes and that the drawings of the year were much less than the deposits. So there could be no deduction under Section 80V.8. The Commissioner (Appeals) dismissed the appeals. It was submitted before him that the ITO cannot put in his own interpretation of Section 80V since the Commissioner in his order under Section 264 has accepted in principle the claim. This submission was rejected by pointing out that the ITO has been directed to examine the claim in accordance with law which allowed the ITO to examine the legal aspects. Apart from this, the Commissioner (Appeals) found, on examination of the accounts that it represented a sort of current account and it cannot be said that the debits for tax payments are substantial borrowals made from the firm. The assessee was having substantial income in all these years. There was nothing to show, according to him, that the tax payments were made from borrowings. He agreed with the ITO on the interpretation of Section 80V also-the allowance under this section would be limited to only such interest as is payable on the borrowings made for taxes paid after 1-4-1976.
9. The assessee is on further appeal before us. We have heard Shri Gautam Doshi for the assessee and Shri Mahadeshwar for the department.
What is the scope of Section 80V is the first issue to be decided.
According to the ITO, the section is applicable only for tax payments effected from borrowals after 1-4-1976 i.e., the date on which Section 80V came into force. According to the assessee, it covers tax payments prior to 1-4-1976 also. The section reads as follows : In computing the total income of an assessee, there shall be allowed by way of deduction any interest paid by him in the previous year on any money borrowed for the payment of any tax due from him under this Act.
There is only one condition laid down in the section. That is, the assessee must have borrowed and the borrowed funds must be utilized in the payment of taxes under the Act. There is nothing in the section which states that the taxes paid should have been after 1-4-1976.
Unless we add 'after 1-4-1976' at the end of the section, it would not be possible to agree with the department's interpretation. It is well settled that a taxing statute must be read as such and nothing should be added or subtracted to the words.
10. Similarly, there is nothing in the section to suggest that the borrowings should be after the date the section has come into force.
All that is required is there should be payment of interest during the accounting year. The taxes could have been paid prior to 1-4-1976. But the borrowals must be outstanding on 1-4-1976 and the assessee should be liable for payment of interest thereon. If these conditions are satisfied, deduction will be available under Section 80V.11. The next issue to be decided is, is there a borrowal at all There is a legal aspect to it as well as factual. We will first deal with the factual aspect.
The Commissioner has given a finding there is not (sic). He points out that the drawings of this year is less than the receipts credited for the three years under consideration. But Shri Doshi referred to the opening debit balances for each of the years and stated that a large part of the opening balances refer to the drawings specifically made for payment of taxes.
12. The second aspect is this : Whether the overdrawing from his account in the partnership firm could be considered as borrowal. Can a partner be said to have borrowed from his firm 13. We take the factual aspect first. The ITO has held that there was no borrowing at all for two of the years on the ground that the drawings for the payment of taxes from the firm was much less than the receipts deposited to his credit therein. In other words, he has held that payment of taxes were effected by drawing on his own funds temporarily deposited with the firm. The Commissioner (Appeals) has also given a similar finding although he has not based his decision on that point. He says in para 5 of his order, "It cannot be said that the debits for tax payments in the account are substantially borrowals made by the appellant from this firm. The appellant is having substantial income in all these years in respect of which taxes have been paid.
There is nothing to show that it cannot be said that these tax payments have come out of this income which has been credited in this account and may as well be elsewhere". To illustrate what the Commissioner (Appeals) says is this : For the year ended 31-3-1975, deposits made during the year was Rs. 8,94,994. Share of profit credited is Rs. 52,355. The tax payment of that year was only Rs. 0.57 lakh. This amount comes from the deposits of this year only and does not represent borrowals.
14. Shri Doshi's answer to this point is that if there had been drawings by a partner beyond the credits, it has to be treated as borrowals only. He relies on Section 11 of the Indian Partnership Act, 1932 and Clause 9 of the partnership deed. Now the issue is not, for the present, whether this represents borrowal or not. The issue is : From where the funds for payment of tax has come from-is it from the amounts deposited by the assessee in the course of the year or is it from the funds of the firm There is no clear answer given to this question. It is, of course, for the assessee to prove that the payment of taxes were effected from borrowed funds and not the amounts deposited in the course of the year.
15. The assumption on which Shri Doshi has made out his case can be understood in the following manner. Right from the accounting year ended 31-3-1962, the assessee has only a debit balance in the books of account of the firm. This debit balance which stood at 0.03 thousand on 31-3-1962 had risen to Rs. 18.74 lakhs by 31-3-1976. The payment of taxes and other withdrawals would necessarily increase the debit balances. Therefore, any withdrawal made from the firm, whether for payment of taxes or for personal expenses comes only from the borrowed funds. This submission assumes that after a debit balance comes into existence, each rupee deposited first would be appropriated to the payment of the borrowals. So there is nothing kept separate, which can be drawn upon.
16. We think the assessee is right. Now the firm is maintaining only one account. It is to this account the income receipts of the assessee are credited. In this background of fact that the assessee has a debit balance, the question would be how the receipts which are credited to his account is to be treated We are of the opinion that Section 60 of the Indian Contract Act, 1872, containing the rules of appropriation would be applicable. This section says that where the debtor has omitted to intimate and there are no other circumstances indicating to which debt the payment is to be applied, the creditor may apply it at his discretion to any lawful debt actually due and payable to him from the debtor. Since the account in the books of the firm is only one and since the amount is credited first to that account and in the absence of any clear indication either by words or by conduct, we will have to assume that the firm had applied the receipts only to the discharge of the existing debts. Thereafter if the assessee makes further drawings, it would be only a fresh borrowal. We are, therefore, unable to accept the department's contention that the tax payments made by the assessee have not come from the funds of the firm.
17. We will now consider the legal aspect, i.e., whether the overdrawings of a partner from the books of the firm would amount to borrowal within the meaning of Section 80V. We may make it clear at this stage itself that this question does not arise for the assessment year 1976-77, i.e., because the ITO himself has accepted that these overdrawings will amount to borrowal. He has, as a matter of fact, allowed the interest payment of Rs. 2,085 under Section 80V. That means the department accepted that this amounts to a borrowal. Therefore, for the assessment year 1976-77, it is not open for us to consider this aspect at all. It is however, to be considered only for the assessment years 1977-78 and 1978-79.
18. The expression 'monies borrowed' is in substance equal to the term 'borrowed money'. The expression 'borrowed money' has been subject-matter of a decision of the Supreme Court in the case of K.M.S.Lakshmanier & Sons v. CIT  23 ITR 202. It has been held therein that the term 'borrowed money' must be construed in its natural and ordinary meaning and implies the real borrowings and a real lending. So the question is whether the monies overdrawn by a partner would be a real lending.
19. The Supreme Court has an occasion to consider the relationship between a partner and the firm in the case of CIT v. R.M. Chidambaram Pillai  106 ITR 292. The Supreme Court observed : ...Here the first thing that we must grasp is that a firm is not a legal person even though it has some attributes of personality.
Partnership is a certain relation between persons, the product of agreement to share the profits of a business. 'Firm' is a collective noun, a compendious expression to designate an entity, not a person.
In income-tax law a firm is a unit of assessment, by special provisions, but is not a full person which leads to the next step that since a contract of employment requires two distinct persons, viz., the employer and the employee, there cannot be a contract of service, in strict law, between a firm and one of its partners....(p. 295) It would be seen from the above, that the Supreme Court is of the opinion that there cannot be a relationship of an employer and employee between a partner and the firm. Later quoting Lindley on Partnership, the Supreme Court observed : The firm is not recognised by English lawyers as distinct from the members composing it. In taking partnership accounts and in administering partnership assets, Courts have to some extent adopted the mercantile view and actions may now, speaking generally, be brought by or against partners in the name of their firm; but, speaking generally, the firm as such has no legal recognition. The law, ignoring the firm, looks to the partners composing it; any change amongst them destroys the identity of the firm; what is called the property of the firm is their property and what are called the debts and liabilities of the firm are their debts and their liabilities. In point of law, a partner may be the debtor or the creditor of his co-partners, but he cannot be either debtor or creditor of the firm of which he is himself a member, nor can he be employed by his firm, for a man cannot be his own employer. (p. 298) The above quotation cited with approval by the Supreme Court makes it clear that in law a partner cannot be a debtor or creditor of the firm of which he himself is a member. No higher authority is required to show that the assessee cannot be considered as a borrower from the firm. Neither can it be said there is any real lending in the sense in which the term borrowed monies have to be understood.
Our finding in the above paras is only that the assessee has not and cannot legally be said to be a borrower of funds from the firm. By giving this decision, the point is not yet fully disposed of. The assessee as a matter of fact did not have funds with him. He has utilised the funds of the firm for discharging his liabilities. Insofar as the assessee had utilized the funds of someone else, he had become indebted to that other person. We have to find out who is that other person. We have further to give a finding whether it could be considered as a borrowing for the purpose of Section 80V. In order to give a finding on this point we have again to refer to the quotation from Lindley on Partnership. It will be seen from the quotation that such transaction should be considered as a borrowal from the co-partner. Now, on the basis of the ratio laid down therein, we must give a finding that there is a borrowal from the assessee's co-partner in this firm. There are two partners only in this firm, the assessee and his brother. We have to give a finding on the basis of the principles of law laid down by the Supreme Court that the creditor is the partner. As far as the co-partner is concerned, the conditions of Section 80V will be satisfied. He is a separate person and the assessee can have dealings with this partner. As a matter of fact also the funds must be held to have been received from the partner through the firm.
20. It will be noticed that the findings given by us have deviated from the prayers made by the assessee. The assessee had all along been submitting that the creditor is the firm. We have not accepted that submission but have substituted another creditor in the firm's place.
In our opinion, it is open for the Tribunal to do so. The assessee's prayer in the grounds of appeal is only one. He wants a deduction under Section 80V. Who is the creditor is a matter of details. It is open for the Tribunal to arrive at a different finding than what was submitted at the time of the hearing.
21. The above finding is also supported by the assessments of the firm and the partners. The interest paid by the assessee to the firm is the income of the firm, in the allocation of profits, however, 50 per cent of the profit gets allocated to the assessee. It would be seen, therefore, that although initially the assessee is debited to the full extent of the interest. In actual fact, the assessee is out of the pocket only to the extent of 50 per cent. The balance has come back to him by way of share of profit. Therefore, the real expenditure of the assessee is only 50 per cent of the interest debited. This also supports our finding that the borrowals are only from the co-partner and that could be only to the extent of the co-partner's interest in the partnership firm. Since the assessee and the partner share profits and losses equally, 50 per cent of the interest is really not an expenditure at all for the assessee.
22. Under these circumstances, we are of the opinion that the assessee would be entitled to a deduction of half the amount claimed by him for the three years.
23. We may consider some of the authorities cited before us. Shri Doshi has cited the decision of the Punjab & Haryana High Court in the case of Pepsu Road Transport Corporation. v. CIT  130 ITR 18. This case is not dealing between a partner and a firm and, therefore, it has no relevance on the issue before us. No doubt, the case deals with the term 'capital borrowed' and had considered contract between a statutory corporation and State Government. We have already quoted a Supreme Court decision for the purpose of understanding the expression 'borrowed monies'. The decision cited, therefore, need not be considered in detail.
24. Shri Doshi has also made a reference to Section 11 of the Partnership Act. This section merely states that the partners may determine their rights and duties for contract. This is also not very relevant. Neither is Clause 9 of the partnership deed very relevant. We also reject the submission made by him that it is not open for the income-tax authorities and, consequently, for the Tribunal to go into the issue whether there is a borrowal at all on the ground that the Commissioner in his order under Section 264 of the Act has already upheld so. We agree with the Commissioner (Appeals) in his findings on this point.
25. We will now consider the objection of the department. In paras 18 and 19 of this order, we have given a finding that the creditor is the copartner. The objection is that the co-partner's accounts have not been scrutinised. If the co-partner has also a debit balance, then he cannot be considered to be a creditor of the assessee. We agree that the decision given by us is based only on the legal principle laid down by the Supreme Court. We have not called for and verified whether the co-partner has a credit balance or a debit balance. Let us assume that the co-partner has only a debit balance. The question would still be from where the funds have come, which had been used by the assessee for the payment of taxes. In case the copartners have got credit balances, to that extent the funds have come from them. In case they have no credit balances, then the funds have come from the creditors of the firm. The firm is under those circumstances used as a pipe to provide the funds to the partners. The decision given by us that the assessee is entitled to the deduction does not require to be altered. The money does not belong to the assessee and, therefore, he have borrowed the same. If there are no funds with the partners, then the monies have come from the creditors of the firm through the media of the firm. In any case, the assessee would be entitled to the deduction under Section 80V.