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TMI Blog1986 (11) TMI 101X X X X Extracts X X X X X X X X Extracts X X X X ..... hand who are partners as kartas of their HUFs received interest from the firm on their deposits in their individual capacities. Shri Mangal Sain was said to have paid interest of Rs. 8,960 and Shri Mool Chand of Rs. 5,126. It was contended before the learned ITO that both partners represented their HUFs in the firm and thus interest paid to them in their individual capacities was not includible in the income of the assessee-firm. The learned ITO, however, made the addition with the following observation: "I have carefully considered the submission of the asses see, but am unable to accept the same. Where the partners represent themselves in a firm in HUF capacity, any interest paid to them in their individual capacity on eartain deposits is includible to the income of the firm. Such being the position and facts of the case, interest paid to Shri Mangal Sain and Shri Mool Chand in their individual capacity is held as includible to the income of the firm. I have gone through the record of the assessee-firm for the assessment years 1980-81 and 1981-82 and find that such interest was itself included to the income of the firm, while making computation of income enclosed with those retu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... w in further appeal before us. Shri P.D. Jain argued on behalf of the assessee and relied upon the following case laws: In the cases of Chhotalal & Co. v. CIT [1984] 150 ITR 276 (Guj.), Terla Yeeraiah, CIT v. Budhalal Amulakhdas [1981] 129 ITR 97 (Guj.), Venkatesh Emporium v. CIT [1982] 137 ITR 593 (Mad.) and Pannalal Hiralal & Co.It was argued on behalf of the assessee that the partners were maintaining two accounts, i.e., (1) on behalf of the HUF, and (2) on their own behalf and that the interest was paid to the partners in their individual capacity and they were representing their HUFs, the provision of section 40(b) of the Income-tax Act, 1961 ('the Act') was inapplicable. According to the learned authorised representative, the learned ITO was not justified to make the addition and the learned AAC further erred in not deleting the unjustifiable additions. 6. On behalf of the revenue the learned departmental representative, Shri S.P. Jain, supported the orders of the authorities below and contended that the existence of two accounts could not prevent the operation of law. According to Shri Jain the case laws relied upon by the learned authorised representative were inapplicabl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n respect of any payment by way of interest, salary, bonus, commission or remuneration made by the firm to any of its partners and does not make any distinction in respect of the character or capacity in which the payment is made to the partner. If a partner makes deposits in the firm of monies belonging to his HUF and also money belonging to him individually, in fact and in law the partner brings in the money. In both cases the payment of interest by the firm to such a partner is as a partner no matter who really has the beneficial interest in such payments.Section 40(b) of the Act would, therefore, apply to the payment of interest to the three partners who were partners in their capacity as kartas of HUF and had deposited their individual money in the firm." 9. A perusal of the above ratio clearly indicates that the partner no doubt may represent his HUF but the law contemplates that he alone is the partner and the other parties of his HUF had not acquired the status of partner in any manner. The revenue's stand gets support from the ratio in this case. In fact, relying upon this very ratio the Hon'ble Madras High Court subsequently in the case of Dwarkadas Rameshwar Goenka held ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ction 40(b) becomes inoperative or inapplicable. Having two accounts does not mean that the provision was not to be applied. In the case before us the interest was paid to the partner and that too in his individual account and it is not clear as to how the provision of law is inapplicable. On behalf of the assessee reliance was also placed on the ratio in the case of Chhotalal & Co. It is noticed that the Hon'ble Gujarat High Court while deciding the issue perhaps was not informed about the decisions in the cases of London Machinery Co., Dwarkadas Rameshwar Goenka and Sanghi Motors as those cases would appear to have not been referred to in the judgment. With due deference to the Hon'ble Gujarat High Court, we are inclined to infer that the views taken by the other three Hon'ble High Courts we have already discussed are in consonance with the spirit of section 40(b). The assessee thus does not get any support from the finding in the case of Chhotalal & Co. Similarly, the ratio in the case of Terla Veeraiah also is of no help to the assessee as the decision in the case of London Machinery Co. appears to have not been brought to the notice of the Hon'ble Andhra Pradesh High Court whi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... interest to these persons in their individual capacity and added it under section 40(b). The allocation of the shares of the partners as made by the ITO would clarify the position Sl. Name of partner Salary Interest Profit Interest Total No. in dividual capacity 1. Shri Mangal Sain one-third 4,800 - 11 949 - 16,749 2. Shri Mool Chand one-third 4,800 1,781 11,949 - 18,530 3. Shri Suresh Chand one-third 3,000 3,701 11,949 - 18,650 4. Shri Mangal Sen - - - 8,916 8,916 5. Shri Mool. Chand - - - 5,125 5,125 12,600 5,482 35,847 14,041 67,970 3. When the matter came before the AAC it was contended before him that the accounts of Shri Mangal Sain and Shri Mool. Chand represented their individuals accounts whereas these persons were representing their HUFs in the firm. The AAC noted that the account of Shri Mool Chand in his individual capacity stood as under: Copy of account of Shri Mool Chand (individual) Rs Rs To cash (gift to assessee's son) 3,000.00 By balance brought forward 1-4-1981 30,900.40 To balance Carry forward 31-3-1982 37,825.90 By salaries 31-3-1982 4,800.00 By interest 31-3-1982 5,125.50 40,825.90 40,825.90 There was another account of Shri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dded under section 40(b). It was held by the High Court that the interest was not paid to the partner as such but to another person who was not a partner. Their Lordships held that there was no impediment in the HUF becoming a partner in a firm in representative capacity. However, the contract is only between the persons who were party to the contract. Their Lordships had held that if the partner representing HUF advances amounts from his individual account to the firm, the interest will not be paid to him in his capacity as a partner but as a stranger. Their Lordships, therefore, dissented from the earlier decision and held accordingly. 5. It was also pointed out that this was a case where the person who contracted was having one account as a partner and another account in his individual capacity where his individual funds were invested. Reliance was also placed on the decision of the Andhra Pradesh High Court in Terla Veeraiah's case where also their Lordships were concerned with two accounts in the firm, one belonging to the HUF and the other belonging to the individual. Some interest had been credited in the HUF account and it was held that interest could not be added as it wa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or by such individual to the firm as partner in a representative capacity and interest paid by the firm to the person so represented or by the person so represented to the firm, shall be taken into account for the purposes of this clause." The departmental representative said that this provision is applicable only from 1-4-1985, but the assessee submitted that this Explanation was added as a clarificatory measure and the Board has stated that this was only to remove a doubt about the legal position which was now being accepted by clarifying the intention. In this connection, reference was made to the Board's information regarding the salient features of the Taxation Laws (Amendment) Act, 1984-[1984] 149 ITR (St.) 127. In this connection it had been stated that a number of amendments have been made to bring out the legislative intention more clearly so that further controversy and litigation between the intent and purports of these persons is avoided. It has been clarified that where a person is a partner in his representative capacity interest paid to him in his individual capacity will not be disallowed under the abovementioned provisions and vice versa. 8. There is no doubt tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... st was paid on the personal loan given by the representative of the HUF and that had been added as income of the firm under section 40(b). Their Lordships held that such interest could not be added as it had not been paid to the partner. 11. Having considered the legal position, I find that the latest decision given by the Full Bench of the Gujarat High Court in Chhotalal & Co.'s case. According to me this represents the correct legal position. Where there are two distinct accounts, one belonging to the partner where the share of profit is credited and the other where deposits are made on deposits which do not belong to the partner, only one account can be considered as belonging to the partner and that account in the present case will be the account standing in the name of the HUF If such an account had not been there and there had been only an account in the name of the partners, then the interest paid in those accounts could be bit under section 40(b). I am of the view that both the accounts could not be treated as belonging to the partner. Thus, following the decision of the Full Bench of the Gujarat High Court and considering the facts of the case, I hold that interest paid i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be added under section 40(b) of the income-tax Act, 1961?" THIRD MEMBER ORDER Per Shri Ch. G. Krishnamurthy, Senior Vice President - This appeal was heard by Delhi Bench 'B' consisting of Shri K.C. Srivastava and Shri S.S. Mehra. They could not agree on the conclusion to be reached on the following point. Hence, that point was referred to me as Third Member by the President of the Tribunal for my opinion. The point of difference of opinion is: "Whether, on the facts and in the circumstances of the case, interest paid in the individual accounts of Shri Mangal Sain and Shri Mool Chand could be added under section 40(b) of the Income-tax Act, 1961?" 2. I have heard the learned departmental representative as well as the learned counsel for the assessee and I am of the view that the opinion of the learned Accountant Member is proper and justified and I am inclined to agree with him. 3. The facts are: The assessee is a registered firm. There were three partners in the firm, namely, Shri Mangal Sain, Shri Mool Chand and Shri Suresh Chand. Shri Mangal Sain and Shri Mool Chand joined the firm as partners as representatives of their respective HUFs, i.e., Shri Mangal Sain was the karta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... etween a partner in his individual capacity and a partner in his representative capacity. In his opinion the interest paid to individual account nonetheless is interest paid to a partner. Referring to, the Gujarat High Court decision in Chhotalal & Co.'s case on which reliance was placed on behalf of the assessee, the learned Judicial Member mentioned that the Gujarat High Court did not notice the decision of the Allahabad High Court in London Machinery Co.'s case and also the decision of the Madras High Court in Dwarkadas Rameshwar Goenka's case and that of the Delhi High Court in Sanghi Motors' case. He, therefore, preferred to follow the other three High Courts decisions rather than the Gujarat High Court decision. Even though there was a reference during the course of the argument before the Bench to a circular issued by the Board and even though the learned Judicial Member referred to it, there was no discussion in his order about the applicability of the circular. 4. The learned Accountant Member, on the other hand, distinguished the decisions relied upon by the learned Judicial Member and relying upon the language of section 40(b) particularly after it was amended by the Ta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... otors' case. 6. As I have expressed earlier I did not find any difficulty in agreeing with the view expressed by the learned Accountant Member that the clarificatory nature of the amendment brought to section 40(b) as expressed by the Board circular found favour with the latest decision of the Andhra Pradesh High Court in the case of N. T. R. Estate. I think it is necessary to briefly refer to the decision of the Andhra Pradesh High Court. The Andhra Pradesh High Court held that the Taxation Laws (Amendment) Act, 1984 has inserted three Explanations with effect from the assessment year 1985-86. The effect of these Explanations is (a) if a person is a partner in a firm in a representative capacity and if such partner lends to the partnership moneys belonging to him individually, then the interest paid to such partner on moneys lent by him is not liable to be added under section 40(b), and (b), if a person is a partner in his individual capacity and if such partner lends to the partnership moneys belonging to the HUF of which he is the karta then the interest paid on the moneys lent by the joint family is not liable to be added back under section 40(b). The Andhra Pradesh High Court ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of objects and reasons introducing the Taxation Laws (Amendment) Bill, 1984, it has been specifically mentioned that the amendments introduced in the Bill are intended mainly to streamline procedures in the interest of better work management, avoid inconvenience to taxpayer, reduce litigation, remove certain anomalies in and rationalise some of the provisions of these enactments and counteract tax avoidance and tax evasion. We consider that the present amendment to section 40(b) of the Act through Explanations 2 and 3 above referred to is to avoid inconvenience to taxpayers, reduce litigation and in that view, the spirit of Explanations 2 and 3 introduced by the Taxation Laws (Amendment) Bill, 1984, should be followed with respect to the preceding assessment years also in order to avoid unnecessary litigation. It cannot be gainsaid that the Legislature was fully aware of the conflict of judicial opinion in this matter among the various High Courts in the country and the present amendment to section 40(b) through Explanations 2 and 3 is brought about to set at rest the controversy. We see no reason to hold that the principle statutorily recognised by Explanations 2 and 3, following ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed Accountant Member this case comes from thePunjabandHaryanaStateand there is no decision of that High Court. Therefore, respectfully following the decision of the Andhra Pradesh High Court, I am of the view that the learned Accountant Member has correctly decided the matter and I would agree with him. 7. Referring to the Allahabad High Court decision in Chandu Lal Surajpal's case, I may point out that this decision relies for its support only on the earlier decision given in the case of London Machinery Co. By referring to its earlier decision the Allahabad High Court held that when a person in his capacity as karta of HUF enters into a partnership with others, the karta is a partner only in his personal capacity. The firm can treat only the karta and not the other members of the joint family as its partner. The capacity in which he receives the payment, namely, for and on behalf of the family or for his own benefit and interest, is immaterial. Payment to a person, who is a partner is the only criterion for the purpose of section 40(b). But this decision proceeds on the basis that when a person in his capacity as karta of HUF enters into partnership with others, karta alone is a ..... X X X X Extracts X X X X X X X X Extracts X X X X
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