1. In these cases, the Tribunal found that one of the partners of the assessee-firm, Smt. K.L. Gangamma, was paid interest of Rs. 12,663 and Rs. 12,915, respectively, in the previous years relevant to the assessment years 1977-78 and 1978-79. It was further found that she had received this interest in her individual capacity, whereas as a partner she was only representative of the estate of late K. Laxmansa. In these circumstances, as in the earlier years, the Tribunal decided that interest paid in her individual capacity could not be added back as if it was interest paid to a partner within the meaning of Section 40(6) of the Income-tax Act, 1961 ('the Act'). The revenue has raised the following question : Whether, on the facts and in the circumstances of the case, the Appellate Tribunal is right in law in upholding the order of the Commissioner (Appeals), deleting the additions of Rs. 12,663 and Rs. 12,915 for the assessment years 1977-78 and 1978-79, respectively, which were disallowed by the Income-tax Officer under Section 40(b) being the interest paid to Smt. K.L. Gangamma 2. It is also stated that a reference has been made from the order of the Tribunal for earlier years and, therefore, a reference of this question should be made for these assessment years also. But, it is pointed out on behalf of the assessee that Section 10 of the Taxation Laws (Amendment) Act, 1984 has introduced Explanation 2 to Section 40(b) to state that interest paid by a firm to an individual, otherwise than as a partner in a representative capacity, shall not be taken into account for the purposes of this clause. It was submitted that in view of this amendment, a reference of this question would be in fructuous.
This was contested by the revenue on the ground that under Section 1(2) of the Amendment Act, the provisions of Section 10 shall come into force from 1-4-1985 and might not govern the assessments for these assessment years. We are unable to accept this objection because the Explanation added to Section 40 by Section 10 of the Amendment Act, is in essence a declaratory Act. Craies on Statute Law, seventh edn., p.
58, states that the usual reason for passing a declaratory Act is to set aside what the Parliament deems to have been a judicial error, whether in the statement of the common law or in the interpretation of statutes. For modern purpose, a declaratory Act may be defined as an Act to remove doubts existing as to the meaning or the effect of any statute. Such Acts are usually held to be retrospective. Maxwell on The Interpretation of Statutes, twelfth edn., p. 224, also states that if a statute is in its nature a declaratory Act, the argument that it is not to be construed so as to take away previously vested rights is inapplicable. In other words, even though Section 10 may come into statute book with effect from 1-4-1985, it will apply to all pending proceedings. If a reference is made in this case, the provisions of the Explanation to Section 40(6) would be attracted by the time the reference is taken up for consideration and the question referred will have to be answered in favour of the assessee, in accordance with the provisions of that section. In the circumstances, any reference of this question will be infructuous and unnecessary. The applications are, therefore, rejected.