1974 (12) TMI 17 - HC - Income Tax

Summary

Issues involved: Interpretation of section 40(b) of the Income-tax Act, 1961 regarding the disallowance of interest credited to the accounts of Hindu undivided families u/s 40(b).

The judgment of the court addressed two references for assessment years 1968-69 and 1969-70, concerning the disallowance of interest credited to the accounts of Hindu undivided families under section 40(b) of the Income-tax Act, 1961. The assessee firm, comprising three partners engaged in wholesale cloth business, credited interest to the accounts of two partners' Hindu undivided families. Disagreement arose between the Income-tax Officer, the Appellate Assistant Commissioner, and the Tribunal regarding the applicability of section 40(b) to these transactions. The Tribunal referred the matter to the High Court for resolution.

The revenue argued that the interest paid to the Hindu joint families represented by the partners in the firm should be considered as payment to the partners u/s 40(b) of the Act, citing a previous court decision. On the other hand, the assessee contended that the interest was paid to the joint families, not the individual partners, thus section 40(b) did not apply. The key contention revolved around whether the interest was paid to the partners or the joint families based on the contractual terms and accounting entries.

The court examined the provisions of section 40(b) which disallow certain amounts in computing business income, specifically mentioning payments made by a firm to any partner. The court analyzed the entries in the books of account where the interest initially credited to individual partners' accounts was later transferred to the accounts of their respective Hindu undivided families. This transfer of interest and profits to the joint families was a crucial factor in determining the applicability of section 40(b) to the case.

In a similar case previously adjudicated by the court, involving interest payments to a Hindu undivided family represented by a partner in a firm, it was held that section 40(b) applied. The court emphasized that the mere transfer of funds between accounts did not alter the nature of the transaction, and interest paid to the joint families was not deductible under section 40(b). Drawing parallels with this precedent, the court concluded that the interest paid to the Hindu undivided families in the current cases was not deductible under section 40(b), ruling in favor of the revenue.