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TMI Blog1985 (11) TMI 49X X X X Extracts X X X X X X X X Extracts X X X X ..... was allowable under section 36(1)(iii) of the Income-tax Act, 1961 ? " Facts giving rise to this reference as per the statement of the case received may be stated in brief thus: The assessee is a registered firm. The previous year relevant to the assessment year 1976-77 ended on March 31, 1976. The return under section 139(1) of the Act was filed on July 26, 1976, declaring an income of Rs. 73,410. The Income-tax Officer in the assessment order pointed out that Shri Hashmatrai (individual), who is a partner in the firm, made a transfer of Rs. 51,000 on April 1, 1970, to his own Hindu undivided family by withdrawing from his individual account maintained by the firm and the said amount has been credited in the Hindu undivided family's acc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o, in the present case, the Income-tax Officer rightly disallowed the interest and reliance was placed on the decision in CIT v. London Machinery Co. [1979] 117 ITR 111 (A11). The Tribunal, after hearing the parties, held as under: " The contents of page 8 of the assessee's paper book, i.e., disallowance of interest during the assessment year 1974-75 do not lead anybody anywhere. In the circumstances of the assessee's case, in terms of section 64(2)(b) of the Act, the interest income in dispute accrues to the partner as individual and not to the Hindu undivided family. Thus, it is safe to infer that the payment of interest said to have been made to the Hindu undivided family, in fact, was made to the partner. Such payment of interest to t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ner, SJ, and in that account no interest was paid in the relevant year. Therefore, the amount of Rs. 7,777 was paid by way of interest to the Hindu undivided family which was the creditor of the firm. The fact that the ' karta ' of the Hindu undivided family was a partner of the assessee-firm was not relevant because, under section 40(b), it is only the interest paid to the partner which is not allowed to be deducted. Interest paid to any other creditor of the firm cannot be disallowed under the provisions of section 40(b)." A Full Bench of the Gujarat High Court in its decision in Chhotalal & Co. v. CIT [1984] 150 ITR 276 (Guj) has overruled the decision in CIT v. Sajjanraj Divanchand [1980] 126 ITR 654 (Guj). However, on going through th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... efore, it is not quite clear on what point this Full Bench has overruled the earlier decision. We may note at this stage that against the decision in CIT v. Sajjanraj Divanchand [1980] 126 ITR 654 (Guj) special leave petition was sought by the Department before the Supreme Court of India, but the same was refused as would be clear from the note at page 15 in [1983] 144 ITR (Statutes). It appears that this fact was not brought to the notice of the Full Bench. The learned counsel also relied on the decision in CIT v. Pannalal Hiralal & Co. [1984] 146 ITR 549 (Bom). The learned counsel for the Revenue submitted that the question referred by the Tribunal in fact does not arise because according to the learned counsel for the Revenue, the ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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;... Provided that the income referred to in clause (b) or clause (c) shall, on being included in the total income of the individual, be excluded, from the total income of the family, or, as the case may be, the spouse or minor child of the individual." The learned counsel for the Revenue also placed reliance on the decision in CIT v. London Machinery Co. [1979] 117 ITR 111 (A11) and Jalam Chand Mangilal (No. 2) v. CIT [1982] 138 ITR 347 (MP), wherein it has been held that (headnote): " Irrespective of the capacity ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted' 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 purpose 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 such i ..... X X X X Extracts X X X X X X X X Extracts X X X X
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