2002 (12) TMI 71 - HC - Income Tax

Business Expenditure - Whether the Appellate Tribunal is right in law in holding that the interest payment of Rs. 1,38,940 made by the assessee to its partners is not hit by section 40(b) of the Income-tax Act, 1961? - we hold that when section 171(9) of the Act statutorily declares a partial partition taking place after December 31, 1978, as null and void, the consequences and incidents which flow from such statutory declaration are that the Hindu undivided family shall be deemed to continue for the purpose of the Income-tax Act and it shall be the owner of the property and further it shall be deemed to be the recipient of the income from such property for the purposes of the Income-tax Act. Therefore, the interest payments made by the firm, though to the partners, shall be treated as if the firm has made the interest payments to the joint family and such payments are not hit by section 40(b) of the Act. Consequently, we are of the view that the Appellate Tribunal was correct in holding that the interest payments made are not disallowable under section 40(b)

Summary

Issues:
- Interpretation of section 171(9) of the Income-tax Act, 1961 regarding partial partition in a Hindu undivided family.
- Applicability of section 40(b) of the Act on interest payments made by a firm to its partners.
- Dispute over whether interest payments were made to individual partners or to the joint family.

Analysis:
The judgment dealt with appeals under section 260A of the Income-tax Act, 1961 concerning the assessment years 1988-89, 1989-90, and 1990-91. The main issue revolved around the treatment of interest payments by a firm to its partners, who were erstwhile members of a Hindu undivided family. The Assessing Officer disallowed the interest payments under section 40(b) of the Act, considering them as paid to individual partners post partial partition. However, the Commissioner of Income-tax (Appeals) and the Appellate Tribunal held that the interest payments were made to the joint family, not individual partners, and thus not liable for disallowance under section 40(b).

The crux of the matter was the interpretation of section 171(9) of the Act, declaring partial partitions post-December 31, 1978, as null and void. The Supreme Court's ruling in Union of India v. M. V. Valliappan clarified that such partitions are not to be recognized for income tax purposes. The court emphasized that the deeming provision extends beyond assessment to other aspects like deductions and exemptions. It held that the interest paid by the firm, though to individual partners, should be treated as paid to the joint family due to the nullity of the partial partition.

The judgment also referenced the decision in Kalloomal Tapeswari Prasad (HUF) v. CIT, emphasizing that until a finding under section 171 confirms a partial partition, the Hindu undivided family is deemed the owner of the property and income recipient. The court invoked the principle of deeming provisions from Gurupad Khandappa Magdum v. Hirabai Khandappa Magdum, highlighting that statutory declarations must be followed through with their inevitable consequences.

Ultimately, the court upheld the Appellate Tribunal's decision, ruling in favor of the assessee and dismissing the appeals. It concluded that the interest payments made by the firm were not disallowable under section 40(b) of the Act, as they were deemed to be paid to the joint family. The Revenue's challenge was rejected, and the assessee was awarded costs.

In conclusion, the judgment clarified the legal implications of partial partitions in Hindu undivided families under the Income-tax Act, emphasizing the deeming provisions and their comprehensive application to various aspects of taxation.