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TMI Blog1986 (9) TMI 133X X X X Extracts X X X X X X X X Extracts X X X X ..... oing business in pawn-broking and money-lending. For the assessment year 1979-80, it returned an income of Rs. 27,870. The assessee itself added back the interest amounts debited to the three partners which are as follows : Rs . 1. Shantilal 4,417 2. Vadmi Bai 4,545 3. Mohan Lal 1,662 -------- 10,624 --------- From the statements accompanying the returns it was disclosed that the interest actually paid to Shri Shantilal was Rs. 18, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... under section 40(b). Thus, he arrived at the total income of the assessee before the firm's tax was deducted at Rs. 45,913. 3. Aggrieved against the said order the assessee filed an appeal before the AAC, Range-A, Vijayawada. The AAC consolidated the appeals for 1979-80 to 1981-82 and disposed them of by his common order dated 21-9-1985 as they comprised similar common point. We have already stated that the disallowance of interest for 1979-80 was Rs. 18,043 whereas the disallowance for the assessment year 1980-81 as having paid to Varadaji Shantilal which is the proprietary concern of Shri Shantilal was Rs. 22,867. The only difference between the assessment years 1979-80 and 1980-81 was the fact that whereas the appeal for 1979-80 arose ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ision in CIT v. Veeraiah Reddiar [1969] 73 ITR 162 and the AAC after considering the case on both sides held that the payment of interest by the assessee-firm on the borrowed money to the sole proprietary concern of a partner was in effect a payment made to a partner only. The fact that the interest was paid not to the partner but to his sole proprietary concern does not make any difference and, therefore, he held that the payment is clearly hit by the provisions of section 40(b). It was argued before the AAC that the assessee was not under an obligation to bring in any additional capital than the capital already invested by his late father. The AAC held that this argument does not make any difference in the situation. Once interest is paid ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e provisions of section 40(b) can be categorised as follows : The person who had invested the moneys and the person to whom the interest is paid are different from each other. For example, if the investment is made from out of the joint family funds and interest is paid to the joint family but if the partner happens to be a karta but at the same time becomes a partner of the firm in his individual capacity then section 40(b) does not apply. That means the partner as well as the karta should not be one and the same person. The payment of interest must be made from out of the income of the firm. In a Madras High Court decision in Gemini Production's case it is held that this was not the case and they categorically held that the amount out of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... .G. Narayanaiah Chetty Co. [1977] 106 ITR 420 (AP). However, in the facts of the case admittedly Shri Shantilal is one of the partners and Varadaji Shantilal who lent heavy amounts to the assessee-firm is a proprietary concern of Shri Shantilal. Thus, it cannot be said that the amount lent is not by a partner but by an outsider or a different person especially in view of the Kerala High Court decision in Veeraiah Reddiar's case. In that case the Kerala High Court fully approved and adopted the interpretation of the analogous provisions by Chief Justice Rajamannar of the Madras High Court in R.A. Goodsir Co. v. CEPT [1948] 16 ITR 367. The following legal position is what is held by Chief Justice Rajamannar in R.A. Goodsir Co.'s case at ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... irm to carry on its business. So also, if a partnership deed does not ordain that all or some of its partners should contribute their special talents (actors, artists, photographers, etc.) but if during the course of business of the firm the services of the partners are utilised not as a partner but as any outsider for instance a artist, photographer, then also section 40(b) does not apply. However, that is not the case here. So, in our considered opinion no case is made out by the assessee that the interest paid by it to one of the partners, viz., Shantilal falls outside the scope of section 40(b) and, therefore, we hold for assessment year 1979-80 there was an obvious mistake in not disallowing interest by the ITO while framing the assess ..... X X X X Extracts X X X X X X X X Extracts X X X X
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