1. This departmental appeal is directed against the order dated 19-10-1987 of the CIT (A), Madurai Range, Madurai, relating to the assessment year 1982-83.
2. The assessee is a registered firm and the assessment year is 1982-83, the official year ending on 31-3-1982, being the relevant previous year.
3. There were two other firms, namely, M/s. P.S.A. Sankara Raja &,Co.
(agriculture), and M/s N.K. Srikanta Raja and Bros, (agriculture). Some of the partners of the assessee firm were also partners in the aforesaid two firms, which, it is common ground, were engaged in agriculture.
4. In the course of the assessment proceedings for the assessment year 1982-83 now before us, the ITO found, inter alia, that, in the books of account of the assessee, the accounts of the two aforesaid firms showed credit balance on which the assessee had paid interest to the said firms, the amount of interest paid by the assessee-firm to the aforesaid two firms respectively being Rs. 47,316 and Rs. 12,004.
On the aforesaid facts the ITO concluded that interest paid by the assessee-firm to the said two firms must be disallowed proportionately.
In this regard the following reasons weighed with the ITO :- (i) No doubt, the assessee-firm had paid interest on the amounts standing to the credit of the aforesaid two firms.
(ii) Even so, some of the partners of the assessee-firm were partners in the said two firms.
(iii) Therefore, to the extent of their respective share in the said two firms, the common partners must be deemed to have lent moneys to the assessee-firm.
(iv) Consequently, a proportionate part of the interest paid by the assessee to the said two firms must be deemed to have been paid by the assessee-firm to the common partners.
(v) Therefore, the proportionate part of interest needed to be disallowed.
The ITO, therefore, disallowed an aggregate sum of Rs. 34,010 (Rs. 19,010 + Rs. 15,000). Though the assessment order contains no specific reference to Section 40(b), the ITO was obviously keeping in mind the provisions of that section.
5. On his part, the CIT (A) deleted the addition on the ground that Section 40(b) does not apply to the facts and circumstances of the case.
7. On hearing the rival submissions, we are rather surprised that the department should have thought it fit to file a second appeal on the aforesaid issue. At the relevant point of time Section 40(b) stood as follows : - 40. Amounts not deductible - Notwithstanding anything to the contrary in Sections 30 to 39, the following amounts shall not be deducted in computing the income chargeable under the head 'Profits and gains of business or profession',- (b) in the case of any firm, any payment of interest, salary, bonus, commission or remuneration made by the firm to any partner of the firm.
The aforesaid provisions are clear and unambiguous. What are to be disallowed under that sub-section arc the amounts paid by the firm to any of its partners as and by way of interest, salary, bonus, commission or remuneration.
8. What is the rationale behind the provisions of Section 40(b) The answer to this question lies in the law relating to partnership. Unlike the Scottish law, which vests the firm with a personality of its own, the Indian and English laws do not recognise a firm as an entity apart from the persons constituting it. Under the said laws, the firm is a "mere a short-hand name for a collection of persons, commercially convenient but not legally recognised". It is this principle that has been incorporated, inter alia, in Section 13 of the Indian Partnership Act, 1932. That section deals with the mutual rights and liabilities of the partners. Sub-section (c) of the section stipulates that where a partner is entitled to interest on the capital subscribed by him, such interest shall be payable only out of profits. The significance of the words "only out of profits" lies in the fact that, the firm being a compendious name for a collection of persons who have agreed to share the profits of the business carried on by all or any of them acting for all, a stipulation as to payment of interest on the capital contributed by a partner is in reality a mode of division of the firm's profits.
9. Partnership is always a matter of agreement. Therefore, it is open to the partners to agree that they will be entitled to receive salary or remuneration from the firm for taking part in the conduct of the business. In that event also, the payment of salary by the firm to the partners will in reality be a mode of division of the profits of the firm. As has been pointed out by the Supreme Court in the case of CIT v. R.M. Chidambaram Pillai  106 ITR 292, just as the partners may agree that interest would be payable on the capital contributed by them, so they can also agree that they will be remunerated for the services rendered by them to the firm, such services being the partners' contribution, in kind, to the firm. Consequently, the remuneration received by the partner from the firm is regarded as a particular mode of division of profits of the firm. In other words, to quote the Supreme Court, "any agreement for remuneration to partner for taking part in the conduct of the business must be regarded as portion of the profits being made over as a reward for the human capital brought in. Section 13 of the Partnership Act brings into focus this basis of partnership business.
10. It is the aforesaid principle of law relating to partnership that has been incorporated in Section 40(b). Therefore, that section cannot be invoked unless it is shown clearly that interest and for remuneration of whatever kind is paid by the firm to its partners.
11. But the matter does not rest there. It is well settled that, even though a firm is a "mere shorthand name for a collection of person, commercially convenient but not legally recognised", yet it has some attributes of personality. As pointed out by the Privy Council in the case of Bhagwanji Morarji Goculdas v. Alembic Chemical Works Co. Ltd. AIR 1948 PC 100, even though the Indian Partnership Act, 1932 goes further than the English Partnership Act, 1890 in recognising that the firm may possess a personality distinct from the persons constituting it, yet the Indian Act, like the English Act, avoids making a firm a corporate body enjoying the right of perpetual succession.
In the case of Jabatpur Ice Mfg. Association v. CIT  27 ITR 88 the Nagpur High Court had an occasion to consider, in the context of Section 26A of the Income-tax Act, 1922, the question whether a firm as such is entitled to enter into a partnership with another firm or individuals. On an exhaustive review of the case law on the subject, the Nagpur High Court ruled that, even though the Indian Partnership Act, 1932 treats the firm as distinct from its members in certain respects, yet it does not invest the firm with a It gal personality capable of entering into a partnership with another firm or individuals. In that regard, the Court further ruled that the definition of the term "person" contained in Section 3(42) of the General Clauses Act could not be imported to hold that a firm was a person, and that consequently it can enter into a partnership with another firm or individuals.
The same question was considered by the Supreme Court in the case of Dulichand Laxminarayan v. CIT  29 ITR 535 and the Supreme Court held that, even under the Indian Partnership Act, 1932, a firm is not regarded as an entity separate and distinct from the members composing it, and that this position in law is not in any way altered merely because both the English and Indian Laws have for some specific purposes relaxed their rigid notions and extended a limited personality to a firm. Interestingly, one of the specific purposes noticed by the Supreme Court related to Order XXXC.P.C, which stipulates, inter alia, that a firm can sue another firm, even if there are common partners.
12. The foregoing analysis would indicate that the two agricultural firms, namely P.S.A. Sankara Raja & Co. and N.K. Srikanta Raja & Bros, cannot in law be regarded as partners in the assessee-firm merely because there were some common partners. All the three firms will have to be treated as separate entities, the presence of common partners notwithstanding. It should, therefore, follow that the Assessing Officer could not have lawfully travelled beyond the clear scope and ambit of Section 40(6) and made the impugned disallowance of Rs. 34,010 (Rs. 19,010+ Rs. 15,000).
13. In view of the foregoing, therefore, we decline to interfere in the matter.