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TMI Blog1995 (3) TMI 49X X X X Extracts X X X X X X X X Extracts X X X X ..... ns of section 40(b) would be applicable to the interest paid to the aforesaid Hindu undivided family for the assessment years 1977-78 and 1978-79 ? The assessee is a firm carrying on business in the manufacture and sale of oil engines. Shri S. P. Kotian, in his individual capacity, was a partner in the assessee-firm from its inception on January 1, 1973. On April 1, 1974, he transferred his interest in the assessee-firm to his Hindu undivided family of which he was the karta. A declaration in this behalf was made by him on March 29, 1975, as under : " 1. From the said partnership-firm as on April 1, 1974, a sum of Rs. 5,000 is due towards my capital account and Rs. 1,14,240.84 towards deposits made by me in the firm, I am entitled to one-third share in the profits of the firm. 2. I state that the abovesaid amount from 1st April, 1974, and all future incomes arising out of these investments are the property of the joint Hindu undivided family, subject to the common rights of all the members of the family and I will not claim any individual rights over the same. The partnership for the years under appeal was as constituted by the partnership deed dated April 1, 1974, for the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... partnership. In the instant case, however, the interest was not paid either on the capital contributed by the partner on behalf of the family, or on his separate funds advanced to the firm, but on monies belonging to a different taxable entity and the decision in Addl. CIT v. Vallamkonda Chinna Balaiah Chetty and Co. [1977] 106 ITR 556 (AP) would hence apply here. In that case there was no stipulation in the partnership agreement in regard to the capital to be contributed by the partners. R was a partner admittedly as representing his family and the latter advanced money to the firm which was credited in R's name and interest was paid on the advance. In the previous year relevant to the assessment year 1968-69, the amount was transferred to R's family account : " It was held that the interest credited to the advances by the family " did not attract the provisions of section 40(b) and that the transfer to R's family account was intended to indicate the real state of affairs since the partners were not required to bring in any capital and not a device adopted to evade the application of section 40(b). In the appellant's case each partner was required to bring Rs. 20,000 as his capita ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se is, therefore, to be distinguished from Addl. CIT v. Vallamkonda Chinna Balaiah Chetty and Co. [1977] 106 ITR 556 (AP). The Revenue urges that the beneficial partner in the firm is the Hindu undivided family and interest is also paid to the self-same Hindu undivided family on the amount diverted to the Hindu undivided family deposit account (by way of transfer of the accrued share income) and refers to the facts noted in the decision in Terla Veeraiah v. CIT [1979] 120 ITR 502 (AP). In that case one Terla Parasuramulu, his son, Veeriah, and grandson, Srisailam, who constituted one Hindu undivided family got themselves divided by a partition. After such partition the three divided members constituted themselves into a partnership firm. Parasuramulu died on January 9, 1969. The partnership continued even after his death. For the accounting years relevant to the assessment years 1970-71 and 1971-72, there were two accounts in the partnership firm. One account was relating to Veeriah as a partner of the firm. This account was styled as Terla Veeriah. This Veeriah being the sole legal heir of the deceased, Parasuramulu, became entitled to whatever amount that the deceased was entitle ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the salary to him in his individual capacity. The appellate authority held in favour of Shri Budhia that the salary amount of Rs. 18,000 assessable in his hands in the status of an individual. The Revenue appealed to the Tribunal. The Tribunal dismissed the Revenue's appeal. The court in the said case observed on the said facts as follows : " In view of the law since settled and concluded, the circumstances that his services were availed of because of the reason that he was a member of the family which had invested funds in the business of the firm, is of no consequence. There being no material to show that Shri Budhia was appointed for service on behalf of the family or as a result of any outlay or expenditure or detriment to the family property, or that his appointment was linked with the acquisition of the business, it has to be held that his employment was an employment of personal responsibility and ability and the remuneration paid to him is in lieu of the contract of service. " A reference is made in the said case to the judgment in CIT v. R. M. Chidambaram Pillai [1977] 106 ITR 292 (SC), which is a judgment of two learned judges of the Supreme Court and upon which reli ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ss the salaried partner's share in it goes to depress his share of income. Surely, therefore, salary is a different label for profits, in the context of a partner's remuneration'. " Krishna Iyer J., was, however, not considering a case of a karta of a Hindu undivided family holding a salaried post in the firm in which the Hindu undivided family was a partner. None of the cases decided by the Supreme Court laying down the law in regard to the remuneration paid to a member of the Hindu undivided family for the services rendered by him to the firm of which the family is a partner were referred to or even casually adverted to by him (Krishna Iyer J.) as, obviously, the question for consideration in the case before him was completely different. The view taken by the Supreme Court in the cases of Raj Kumar Singh Hukam Chandji v. CIT [1970] 78 ITR 33 ; Prem Nath v. CIT [1970] 78 ITR 319 CIT v. Gurunath V Dhakappa [1969] 72 ITR 192 ; V. D. Dhanwatey v. CIT [1968] 68 ITR 365 and CIT v. D. C. Shah [1969] 73 ITR 692, are all authorities being judgments of the Supreme Court of India for the principle that in the absence of any evidence that the remuneration agreed to be paid was not for the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he context of a partner's remuneration. " In CIT v. London Machinery Co. [1979] 117 ITR 111, a Bench of the Allahabad High Court has considered a case of payment of interest to the partners who constituted the firm acting as kartas of their respective Hindu undivided families. The Hindu undivided families contributed capital, but the partnership deed provided that no interest shall be paid on it unless the partners agreed otherwise. Four other partners in the firm, however, entered the firm in their individual capacities. The three kartapartners deposited funds belonging to each of them in their individual capacity in the accounts of the firm. The firm paid to each of them interest amounting to a total of Rs. 20,966 as individuals. The firm claimed deduction of this amount as business expenditure. The Income-tax Officer disallowed it. The disallowance was upheld on appeal. The assessee took the matter to the Tribunal. The Tribunal considered the matter elaborately and held that the three kartas were partners in the firm as representing their Hindu undivided families. The deposits were made by them from their own personal funds. The firm paid interest to them in their individual c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... parable to payment of salary, remuneration and in case of such payment to the partner, whether he represented his Hindu undivided family as the karta or not, held that the interest paid by the firm to the partners either on the amounts brought by them from their respective Hindu undivided family funds, or brought from their own individual funds is in either case payment of interest to the partners and fell within the purview of section 40(b) and was inadmissible as a deduction in the hands of the firm. It is not difficult, however, to see the reason why the Allahabad High Court took the above view. The above view is taken only as a consequence of the conclusion that the definition of the word " person " occurring in section 2(9) of the Act cannot be imported into the Partnership Act, the provisions of which alone are relevant for finding as to who could join as partners, and (at page 116 of 117 ITR) : " When a person in his capacity of karta of a Hindu undivided family enters into a partnership with others, the karta in his personal capacity alone is the partner. The firm can treat the karta and not the other members of the Hindu undivided family as its partner. " To reconcil ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... managing director for its meaningful existence. The court has observed that it is only in this way that the karta figures in all transactions concerning the joint family. The transactions themselves are the family's transactions, and none the less so, for the fact that they have, per force, got to be put through by some one like the karta. But, as the Supreme Court has pointed out, this concept of a joint Hindu family, being a unit by itself, may not fit in with the requirements of some branches of the law, such as the law of partnership, After taking notice of the status of a partnership, vis-a-vis, income-tax law, the court has observed : " As we earlier observed, section 40(b) only entitles the Income-tax Officer to add back payments of interest made by a firm to its partner. If the payment is made not to a partner but to the partner's joint family, the section cannot be invoked at all. " and concluded : " It must, therefore, be held that except in a case where the Income-tax Officer is in a position to show that the interest payment by a firm is to a partner as such, section 40(b) cannot be invoked for disallowing the payment in the computation of the firm's chargeable i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ivided family, any property having been the separate property of the individual has, at any time after the 31st day of December, 1969, been converted by the individual into property belonging to the family through the act of impressing such separate property with the character of the property belonging to the family or throwing it into the common stock of the family (such property being hereinafter referred to as the 'converted property'), then, notwithstanding anything contained in any other provision of this Act or in any other law for the time being in force, for the purpose of computation of the total income of the individual under this Act for any assessment year commencing on or after the 1st day Of April, 1971, --- (a) the individual shall be deemed to have transferred the converted property, through the family, to the members of the family for being held by them jointly ; (b) the income derived from the converted property or any part thereof shall be deemed to arise to the individual and not to the family ; (c) where the converted property has been the subject-matter of a partition (whether partial or total) amongst the members of the family, the income derived from s ..... 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