9911796707
TMI Blog1984 (12) TMI 153X X X X Extracts X X X X X X X X Extracts X X X X ..... f Rs. 20,779 was excessive considering that the opening and closing stocks were estimated at round figures of Rs. 9,000 and Rs. 10,000, respectively, and there was no proper check on the account. Accordingly, he disallowed Rs. 10,000 from the claim. The ITO also noticed that the firm had credited the individual accounts of the partners S/Shri Poonamchand, Bansilal and Mangalchand with interest amounting to Rs. 8,003, Rs. 3,990 and Rs. 4,636, respectively, amounting in all to Rs. 16,630. He disallowed the interest invoking the provisions of section 40(b) which lays down, that, in the case of a firm, any payment of interest to any partner of the firm shall not be deducted. 3. On appeal, the AAC reduced the disallowance of loss in the bardana account to Rs. 3,000 and confirmed the interest disallowance observing as follows : " The ITO disallowed payment of interest to the tune of Rs. 16,630 under section 40(b). The appellant's counsel submitted that the partners represent their respective HUFs in the appellant firm and the investments were made in their capacities as individuals. So the counsel pleaded that the interest paid to the partners in their individual capacities should no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... alam Chand Mangilal (No. 1) v. CIT [1982] 138 ITR 343 and Jalam Chand Mangilal (No. 2) v. CIT [1982] 138 ITR 347 were no longer good law in view of the dismissal by the Supreme Court of the SLP (Civil) No. 7736 of 1981 filed by the department against the decision of the Gujarat High Court in CIT v. Sajjanraj Divanchand [1980] 126 ITR 654. The main contention in this behalf was, that the partners were partners of the firm in their capacity as kartas of the respective HUFs and, therefore, interest credited on the moneys advanced by them in their individual capacity was not liable to be disallowed under section 40(b) and support for this view was sought to be derived from the decision of the Gujarat High Court in Sujjanraj Divanchand's case. Reliance was also placed on the following decisions of various other High Courts : CIT v. Pannalal Hiralal Co. [1984] 146 ITR 549 (Bom.), CIT v. K. Krishnaiah Chetty Sons [1981] 131 ITR 410 (AP), Venkatesh Emporium v. CIT [1982] 137 ITR 593 (Mad.), Ram Lal Sons v. CIT [1980] 124 ITR 157 (All.), [1984] 12 ITC 187 (sic), [1984] 20 TTJ (Mad.) 8. Our attention was also invited to the decisions of the Tribunal in [1984] 12 ITC 187 (sic) and [19 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s a partner of the firm was not relevant because under section 40(b) it was only the interest paid to the partner which was not allowed to be deducted. Accordingly, the interest paid to any other creditor of the firm could not be disallowed under the provisions of section 40(b). From the above facts, it is clear that the creditor of the firm was not the partner but the HUF of which the partner was the karta and, therefore, the creditor of the firm was a separate entity and interest paid to the separate entity was rightly held to be not governed by section 40(b). It was against this decision, that the SLP filed by the department was dismissed by the Supreme Court. In the present case the facts are totally different. The interest was not paid by the firm in the HUF's account. The interest was credited in the individual partners' accounts and the individuals were representing their respective HUFs in the partnership. The distinction between these two cases is, that, in the Gujarat High Court's decision, interest was paid to the HUF's account and not in the individual partners account's. That was the reason for the High Court holding that the creditor of the firm was not the partner ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ase, the High Court decided that irrespective of the capacity in which a person became a partner of a firm, section 40(b) was a bar to the payment of interest to him. They held that the main fact to be considered for applying section 40(b) was not as to in what capacity the loan was advanced or interest was paid to a person who had joined as partner of the firm. They further held that where a person joined as a partner of a firm in his individual capacity and interest was paid to him as karta of a HUF, the payment of interest was not deductible under section 40(b). While coming to this conclusion they referred to the decision of the Allahabad High Court in London Machinery Co.'s case with approval. In that case, the karta partners deposited funds in their individual capacity and the firm paid interest to them as individuals as exactly happened in this case. The matter being finally taken to the Allahabad High Court, it was held that the interest paid by the firm to the partners on amounts brought in their individual capacity was a case of interest paid to the partners and as such inadmissible under section 40(b). The Madhya Pradesh High Court also referred to the Gujarat High Court ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntity will not be governed by section 40(b) and cannot be disallowed. In the instant case, there were two separate accounts. One in the individual name of Sajjandas Jwaladas and the other in the name of HUF of Shri Sajjandas Jwaladas. The amount of Rs. 7,777 was paid as interest to the HUF of Sajjandas Jwaladas. That being the case, it was paid to the creditor who was not a partner of the firm. Under these circumstances, the conclusion of the Tribunal was correct, We, therefore, answer the question referred to us in the affirmative that is, in favour of the assessee and against the revenue. The Commissioner will pay the costs of the reference to the assessee." 9. in the present case, the creditors of the firm are definitely the partners. This distinction has been very clearly brought out by the Madhya Pradesh High Court in Jalam Chand Mangilal's case. We are, therefore of the opinion that, even as per the decision of the Gujarat High Court in Sajjanraj Divanchand's case, the interest paid to the individual partners cannot be allowed as a deduction in Jalam Chand Mangilal (No. 2)'s case. 10. We are, therefore, of the opinion,, that the decision of the Madhya Pradesh High Court ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
