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TMI Blog2002 (8) TMI 81X X X X Extracts X X X X X X X X Extracts X X X X ..... ature. - the position of law is well settled and we do not think that this question requires any further elucidation. Accordingly, both the questions are answered in the affirmative, i.e., in favour of the assessee and against the Revenue. X X X X Extracts X X X X X X X X Extracts X X X X ..... rm was assessed in the hands of the two partners. Shri Ram Prasad in his disclosure petition dated August 9, 1965, stated that he was a partner in the firm, Bhagwati Prasad Ram Sarup, and that at the time of his marriage he had received substantial amounts from far and near relations in the shape of silver coins, which were kept with his wife and later on sold for Rs. 40,000. He stated that he believed that this Rs. 40,000 was his wife's exclusive property. He further stated that with this amount he purchased and sold bidis and the money earned from bidi business was kept with his wife. He added that although he had a bona fide belief that this money was his wife's exclusive property but since he had no evidence to prove his claim, he was offering a sum of Rs. 76,062 for assessment. This amount was offered for assessment in his own assessment in which the income from the firm (which was undoubtedly the joint family income) was being assessed. This income was offered for being assessed as joint family income. Similarly, Shri Ram Prasad surrendered the deposits for assessment along with his share income from the firm, which was the income of the joint family. Both the partners also g ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ate Tribunal, the assessee took the stand that these two partners were carrying on some individual business and that they made disclosure petitions, which were not accepted, and the nature and source of the deposits made by them were also not explained. Accepting the above contention of the assessee, the Tribunal observed that this showed that they were having some other undisclosed sources of income, but that certainly it was not from the firm; that there could be no presumption that in a joint Hindu family the business carried on by a coparcener belonged to the family and that the coparceners could carry on their individual business as well. The Tribunal further observed that there could be no presumption that the other business, which these persons were carrying on, also belonged to the family. The Tribunal further observed that it was from the assessment year 1966-67 that these two partners opened their individual account in the books of the firm and interest was being paid on that account; that in the assessment year 1968-69, though interest was not paid, but that it did not mean that interest was not payable on those accounts. Observing that a karta is a separate entity while ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d back in the income of the assessee. It appears that up to the assessment year 1951-52 it was done in the status of a Hindu undivided family and thereafter a partition took place in the family and the firm was constituted. In the assessment year 1952-53, the partition was accepted. It was clearly recorded in the findings of the Income-tax Appellate Tribunal referring to the final order of the respective Appellate Assistant Commissioner of Income-tax. It was submitted on behalf of the Revenue that no evidence was adduced at that time that the partner had any individual business. On the basis of this fact, the Tribunal held that no such inference could be drawn that it was Hindu undivided family account as no withdrawals were made except for personal expenses and as such the said view of the Appellate Assistant Commissioner of Income-tax was not accepted. Referring to the Income-tax Officer's order in the assessment year 1968-69 in the case of Shri Ram Prasad, it was stated that no interest was charged on individual accounts, which shows that this account was treated as belonging to the Hindu undivided family. According to the Departmental Representative, it was an important state ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t family. But when he does so, the other members of the family do not, vis-a-vis the outsiders, become partners in the firm. They cannot interfere in the management of the firm or claim any account of the partnership business or exercise any of the rights of partners. So far as outsiders are concerned, it is the karta, who alone is, and is in law recognised, as the partner. Whether in entering into partnership with outsiders the karta acted in his individual capacity and for his own benefit, or he did so as representing his joint family and for its benefit, is a question of fact. In the instant case, there is no dispute that Prahladrai entered into the partnership representing his joint family and for the benefit of that family. But although that is so, the relationship between the partnership and Prahladrai was that of an individual appointed as a partner. The partnership was not in any way concerned with the fiduciary relationship in which Prahladrai stood with the family, which he represented. Thus, the profit earned by Prahladrai as a partner of the assessee-firm may become the income of the family which he represented in the partnership but that would not entitle the partnersh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rm, the amount of interest to be disallowed under this clause shall be limited to the amount by which the payment of interest by the firm to the partner exceeds the payment of interest by the partner to the firm. Explanation 2. -Where an individual is a partner in a firm on behalf, or for the benefit, of any other person (such partner and the other person being hereinafter referred to as 'partner in a representative capacity' and person so represented respectively), (i) interest paid by the firm to such individual or by such individual to the firm otherwise than as partner in a representative capacity, shall not be taken into account for the purposes of this clause; (ii) interest paid by the firm to such individual 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. Explanation 3. -Where an individual is a partner in a firm otherwise than as partner in a representative capacity, interest paid by the firm to such individual shall not be taken into account for the purposes of this clause, if su ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... luded that since an individual and a Hindu undivided family are two distinct entities for the purpose of the Act, clause (b) of section 40 has no application where the interest is paid to the partner on deposits made by him with the firm in his individual capacity where such person is a partner not in his individual capacity but as representing a Hindu undivided family. Sri G. C. Sharma, learned counsel for the appellant-assessee, strongly relies upon this decision and commends it for our acceptance. Learned counsel points out that even before the enactment of the Taxation Laws (Amendment) Act, 1984 (which inserted Explanation 2 aforesaid), a majority of the High Courts in the country had taken the same view though a few High Courts have no doubt taken a contrary view. Looked at from any angle, Sri Sharma says, the issue must be answered in favour of the assessee. Clause (b) of section 40 is based upon and is a recognition of the basic nature of the relationship between a firm and its partner. In CIT v. R. M. Chidambaram Pillai [1977] 106 ITR 292, this court observed: 'Here the first thing that we must grasp is that a firm is not a legal person even though it has some attributes ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... agree with the view taken by the Rajasthan High Court in Gajanand Poonam Chand and Brothers' case [1988] 174 ITR 346 that Explanation 2, in the context of clause (b) of section 40, is declaratory in nature. Accordingly, we allow this appeal, set aside the judgment of the High Court and answer the question referred under section 256 in the affirmative, i.e., in favour of the assessee and against the Revenue." Accordingly, it appears that the Supreme Court in the case of Brij Mohan Das Laxman Das v. CIT [1997] 223 ITR 825 held that even for the period anterior to April 1, 1985, any interest paid to a partner, who is a partner representing his Hindu undivided family on the deposit of his personal/individual funds, does not fall within the mischief of clause (b) of section 40 of the Act and agreed with the view of the Rajasthan High Court that Explanation 2, in the context of clause (b) of section 40, is declaratory in nature. In the case of Suwalal Anandilal Jain v. CIT [1997] 224 ITR 753, the Supreme Court followed the same principle of law laid down earlier in the case of Brij Mohan Das Laxman Das [1997] 223 ITR 825. In view of the above pronouncements of the Supreme Court, the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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