1995 (3) TMI 49 - HC - Income Tax

Summary

Issues Involved
1. Applicability of Section 40(b) of the Income-tax Act, 1961.
2. Treatment of interest paid to a Hindu Undivided Family (HUF) represented by a partner.
3. Interpretation of Section 64(2) of the Income-tax Act, 1961.
4. Distinction between individual capacity and HUF capacity in partnership.

Issue-wise Detailed Analysis

1. Applicability of Section 40(b) of the Income-tax Act, 1961
The primary issue was whether the Tribunal was justified in disallowing the interest payment under Section 40(b) of the Income-tax Act, 1961. The Tribunal agreed with the Revenue that the disallowance was justified as the beneficial owner of the share income and the recipient of the interest were the same, i.e., the HUF represented by S. P. Kotian. The Tribunal distinguished the present case from Vallamkonda Chinna Balaiah Chetty and Co., stating that the interest payment was on the accrued share income transferred to the HUF income deposit account, which converted S. P. Kotian's current account into a debit balance. Therefore, the HUF did not advance separate monies and could not be treated as a separate creditor.

2. Treatment of Interest Paid to a Hindu Undivided Family (HUF) Represented by a Partner
The Tribunal observed that the interest credited to the HUF account was not a payment made to the partner as such but to the HUF. It referred to the case of Terla Veeraiah v. CIT, where interest credited to a partner's HUF account was not disputed as a disallowance under Section 40(b). The Tribunal held that the beneficial partner in the firm was the HUF and the interest paid to the HUF on the amount diverted to the HUF deposit account was rightly disallowed under Section 40(b).

3. Interpretation of Section 64(2) of the Income-tax Act, 1961
The Tribunal also took notice of Section 64(2) of the Act, which states that the income derived from converted property (i.e., property converted from individual to HUF) shall be deemed to arise to the individual and not to the family. This provision was crucial in determining that the entire share income, even if credited to the HUF, was deemed income of S. P. Kotian.

4. Distinction Between Individual Capacity and HUF Capacity in Partnership
The judgment discussed various precedents to clarify the distinction between individual capacity and HUF capacity in partnerships. It referenced the Full Bench decision of the Patna High Court in CIT v. Atma Ram Budhia, which held that remuneration paid to a partner representing an HUF is his individual income if there is no real and sufficient connection between the investment of joint family assets and the remuneration. The judgment also cited the Supreme Court's decision in CIT v. R. M. Chidambaram Pillai, which emphasized that a contract of employment requires two distinct persons and that salary paid to a partner is a portion of the profits.

The judgment concluded that in the instant case, the capital contribution by S. P. Kotian was his separate property, and even though he converted it into HUF property, the income derived from it would be deemed to arise to him individually under Section 64(2). Therefore, the interest paid to the HUF was rightly disallowed under Section 40(b).

Conclusion
The Tribunal's decision to disallow the interest payment under Section 40(b) was upheld. The judgment emphasized the importance of scrutinizing the facts to determine whether the income belongs to the HUF or the individual partner. In this case, the income was deemed to arise to the individual partner, S. P. Kotian, despite the conversion of property into HUF property. The reference was answered accordingly, with no costs awarded.