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TMI Blog1984 (12) TMI 161X X X X Extracts X X X X X X X X Extracts X X X X ..... unt. Accordingly, he disallowed Rs. 10,000 from the claim. The ITO also notice, that, the firm had credited the individual accounts of the partners S/Shri Poonamchand, Bansilal and Mangalcand 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 s. 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 s. 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 not have been disallowed by the ITO under s. 40(b). The counsel relied on the decision in the case of Terla Veeraiah vs. CIT (1979) 120 ITR 502 (AP). However, I am of the opinion that the partners are only i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y the Supreme Court of the S.L.P. (Civil) No. 7736 of 81 filed by the Department against the decision of the Gujarat High Court in CIT vs. Sajjanraj Diwanchand (1982) 21 CTR (Guj) 26 : (1980) 126 ITR 654 (Guj). 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 s. 40(b) and support for this view was sought to be derived from the decision of the Gujarat High Court in (1981) 21 CTR (Guj) 56 : (1980) 126 ITR 654 (Guj). Reliance was also placed on the following decisions of various other High Courts: (1983) 144 ITR (St.) 15, CIT vs. Pannalal Hiralal Co. (1983) 36 CTR (Bom) 414 : (1984) 146 ITR 549 (Bom), CIT vs. Hansa Dyeing Printing Works 1976 CTR (Bom) 482, CIT vs. K.Krishnaiah Chetty Sons (1981) 131 ITR 410 (AP), Venkatesh Emporium vs. CIT (1982) 137 ITR 593 (Mad), Ram Lal Sons vs. CIT (1980) 15 CTR (All) 74 : (1980) 124 ITR 157 (All). Our attention was also invited to the decision of the Tribunal in 12 ITC (1984) p. 187 and First ITO vs. S.R.S. Brothers (198 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... HUF which was paid the creditor of the firm." They also held, that, the fact that "the Karta" of the HUF was a partner of the firm was not relevant because under s. 40(b) it was only the interest paid to the partner which was not allowed to be deducted. Accordingly to the, interest paid to any other creditor of the firm could not be disallowed under the provisions of s. 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 was rightly held to be not governed by s. 40(b). It was against this decision, that the S.L.P. filed by the Department was dismissed by the Supreme Court vide (1983) 144 ITR (St.) 15. 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 partner s 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 partner s account. That was the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... these facts were totally different from the facts of the case before them and did not see any reason to follow the decision in (1981) 21 CTR (Guj) 26 : (1980) 126 ITR 654 (Guj). In (1983) 33 CTR (MP) 29 : (1982) 138 ITR 347 (MP), the High Court decided, that irrespective of the capacity in which a person became a partner of a firm, s. 40(b) was a bar to the payment of interest to him. They held, that, the main fact to be considered for applying s. 40(b) was not, as to, in what capacity the loan was advanced or interest was paid to a person who had joined as a 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 s. 40(b). While coming to this conclusion, they referred to the decision of the Allahabad High Court in (1979) 10 CTR (All) 301 : (1979) 117 ITR 111 (All) 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 int ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... artner of the firm and irrespective of the character in which he is the partner of the firm, whether any interest is paid to him as partner. If the creditor of the firm is not the partner but the HUF of which the partner is the Karta, then a separate entity is the creditor of the firm and interest paid to that separate entity will not be governed by s. 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 CIT will pay the costs of the reference to the assessee." In the present case, the creditor of the firm are definitely the partners. This distinction has been very clearly brought out by the Madhya Pradesh High Court at page 350 of the decision in 138 ITR. We are, therefore, ..... X X X X Extracts X X X X X X X X Extracts X X X X
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