Tenancy-in-common and partner-heir interest: credited amounts to a deceased partner's estate attracted disallowance under section 40(b).

Interest credited by a firm to the account of a deceased partner's estate was examined under section 40(b) of the Income-tax Act, 1961. On the death of the intestate partner, succession vested immediately in the Class I heirs, who took definite one-fifth shares as tenants-in-common under the Hindu Succession Act; their continued joint enjoyment of an undivided estate did not make them a body of individuals or an association of persons. As each heir had a defined share, the interest relatable to the partner-heirs was treated as interest payable to partners and attracted section 40(b). The four-fifths disallowance was upheld.

---

---

Issues: Whether interest credited by a firm to the account styled as the estate of a deceased partner was liable to be disallowed under section 40(b) of the Income-tax Act, 1961, on the footing that the deceased's heirs constituted a body of individuals or association of persons and, in substance, the payment was to partners.

Analysis: On the death of the Hindu male intestate, succession vested immediately in the Class I heirs. Under sections 8, 9, 10 and 19 of the Hindu Succession Act, the widow, sons and daughter each took an equal one-fifth share and held the property as tenants-in-common. The mere fact that the estate remained undivided because of differences among the heirs did not postpone vesting or convert the heirs into a body of individuals. There was also no voluntary coming together to earn income so as to constitute an association of persons. Since each heir had a definite share in the interest, the portion relatable to the partner-heirs was interest payable to partners within section 40(b).

Conclusion: The addition of four-fifths of the interest under section 40(b) was justified and the deletion made by the first appellate authority was unsustainable.

Ratio Decidendi: Where heirs of an intestate hold an undivided estate as tenants-in-common without constituting a body of individuals or an association of persons, income credited in respect of their definite shares is attributable to the partner-heirs to the extent of their respective interests and attracts section 40(b) in the hands of the firm.

---