1988 (9) TMI 23 - HC - Income Tax

Summary

Issues:
1. Whether a partner was entitled to withdraw Rs. 50,000 from the capital account and make a gift of the same.
2. Whether the gift made by the partner was valid.
3. Whether the interest payment relating to the gifted amount was an allowable deduction for the assessee-firm.

Analysis:
The High Court of GAUHATI addressed a case involving Mahatta Construction Co., where a partner, Mohanlal Choudhury, withdrew Rs. 50,000 from the firm's capital account and gifted it to his niece, Anju Mahatta. The court considered the legality of the withdrawal, the validity of the gift, and the deductibility of interest payments related to the gifted amount for the assessment years 1970-71 and 1971-72. The Income-tax Officer initially disallowed the interest payments, arguing that the withdrawal was not legal. However, the Appellate Assistant Commissioner allowed the appeal, stating that under the Indian Partnership Act, a partner can withdraw unless otherwise agreed. The Appellate Tribunal upheld this decision.

The court examined whether there was a provision in the partnership deed allowing partners to withdraw from the capital account. The Revenue contended that without a specific agreement, the withdrawal was improper. Conversely, the assessee's counsel argued for findings on various aspects, including the existence of an express agreement, the nature of the partner's account, and past conduct regarding withdrawals. The court noted findings by the appellate authority that there was no prohibition on withdrawals and that partners had withdrawn amounts previously for various purposes.

Referring to Section 11 of the Indian Partnership Act, which allows determination of partners' rights by contract, the court found that if partners were withdrawing amounts with no prohibition, it implied an agreement permitting withdrawals. As such, there was no need for additional findings. The court concluded that the withdrawal and subsequent gift were not improper, especially considering the taxation of the gifted amount. It was determined that the interest payment to the donee was also valid, given the circumstances of the case.

In the final judgment, the court ruled in favor of the assessee, stating that there was no illegality in the transactions. The judges concurred on the decision, with S. N. PHUKAN J. agreeing with the judgment. The court did not find it necessary to delve into the numerous cases cited, ultimately deciding in favor of the assessee without imposing any costs.