9911796707
TMI Blog1986 (11) TMI 39X X X X Extracts X X X X X X X X Extracts X X X X ..... he interest is paid to a partner in a somewhat different capacity, the amount has to be deducted as an allowable deduction. Briefly, the facts of the present case are that reference has been made under section 256(1) of the Income-tax Act, at the instance of the Commissioner of Income-tax by the Income-tax Appellate Tribunal, Nagpur Bench, to answer the following question: "Whether the Tribunal was correct in allowing the assessee's claim for interest paid on the credit balance in the individual account of Shri Prakashchand ? " The question arose in the assessment of the firm, M/s. Narbharam Popatbhai & Sons, Raipur, for the assessment year 1977-78. Shri Prakashchand was a partner in the firm in his capacity as a karta of the joint Hindu family consisting of himself, his wife and minor son. The firm had two accounts, one in the name of the joint Hindu family and the other in the individual account of Shri Prakashchand who had deposited certain amounts with the firm. The firm paid interest on the deposit of Shri Prakashchand to the tune of Rs. 18,385 during the year under assessment and the firm claimed this amount as permissible expenditure deductible under section 37 of the Incom ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Same is the approach towards salary, bonus, commission or remuneration. The Privy Council in Pichappa Chettiar v. Chockalingam Pillai [1934] AIR 1934 PC 912 held that where a managing member of joint family enters into a partnership with a stranger, the other members of the family do not ipso facto become partners in the business so as to clothe them with all the rights and obligations of a partner as defined by the Indian Contract Act. In such a case, the family as a unit does not become a partner, but only such of its members as in fact enter into a contractual relation with the stranger : the partnership will be governed by the Act. Approving this decision, the Supreme Court in Charandas Haridas v. CIT [1960] 39 ITR 202, held that there are three different branches of law to notice. There is the law of partnership, which takes no account of a Hindu undivided family. There is also the Hindu law, which permits partition of the family and also a partial partition binding upon the family. There is then the income-tax law, under which a particular income may be treated as the income of the Hindu undivided family or as the income of the separated members enjoying separate shares by pa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , third parties are not barred from dealing with him in his representative capacity, for, they are not parties to the contract of partnership. The Revenue is in no way precluded from dealing with a partner as a representative if he is one such, as for instance, where he is the " karta " of a Hindu undivided family. The income derived by him as partner would really be the income of the Hindu undivided family and really derived by the Hindu undivided family. If it is a Hindu undivided family on behalf of which he receives the income, the partner being its representative, it is the income of the family which is ultimately to be assessed. The matter has been made clear by adding Explanations 1 to 3 to section 40(b) by the Taxation Laws (Amendment) Act, 1984, which came into force from April 1, 1985. Explanations 2 and 3, which are relevant for our purpose, are quoted hereunder: "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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uting the business profits of the assessee-firm, the interest paid to V on monies advanced by him from his individual funds should not be deducted in view of section 40(b) of the Income-tax Act, 1961. The Tribunal held that the interest paid should be disallowed. On a reference: Held, that in computing the business profits of the assessee-firm, the interest paid to V on monies advanced by him from his individual funds could not be disallowed. The interest paid to V was not paid to him as partner but as a stranger. " The facts of the aforesaid case are identical to the facts of the present case. Similar view has been taken by the Bombay High Court in CIT v. Hansa Dyeing & Printing Works [1976] CTR 482 and CIT v. Pannalal Hiralal & Co. [1984] 146 ITR 549 (Bom), by the Madras High Court in Venkatesh Emporium v. CIT [1982] 137 ITR 593 and CIT v. Colombo Stores [1984] 149 ITR 108 (Mad) and Terla v. CIT [1979] 120 ITR 502 (AP). The Gujarat, Andhra Pradesh and Madras High Courts have differed and distinguished their earlier contrary view taken, in the aforesaid cases. A Division Bench of the Andhra Pradesh High Court in N. T. R. Estate v. CIT L1986] 157 ITR 285 held as under (headnote): ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... terms any allowance in respect of any payment by way of interest, salary, bonus, commission or remuneration made by the firm to any of its partners and does not make any distinction in respect of the character or capacity in which the payment is made to the partner. If a partner makes deposits in the firm of monies belonging to his Hindu undivided family and also money belonging to him individually in fact and in law the partner brings in the money. In both cases the payment of interest by the firm to such a partner is as partner no matter who really has the beneficial interest in such payments. Section 40(b) of the Act would, therefore, apply to the payment of interest to the three partners who were partners in their capacity as kartas of Hindu undivided family and had deposited their individual money in the firm. " This has been followed by the same High Court in CIT v. Chandu Lal Surajpal F [1986] 157 ITR 346, by the Andhra Pradesh High Court in CIT v. T. Veeraiah and K. Narasimhulu [1977] 106 ITR 283, by the Madras High Court in Dwarkadas Rameshwar Goenka v. CIT [1981] 127 ITR 397, by the Delhi High Court in Sanghi Motors v. CIT [1982] 135 ITR 359, by this court in Jalam Chan ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
