TaxTMI 
TaxTMI 
1986 (11) TMI 101
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....l Sain and Shri Mool Chand who are partners as kartas of their HUFs received interest from the firm on their deposits in their individual capacities. Shri Mangal Sain was said to have paid interest of Rs. 8,960 and Shri Mool Chand of Rs. 5,126. It was contended before the learned ITO that both partners represented their HUFs in the firm and thus interest paid to them in their individual capacities was not includible in the income of the assessee-firm. The learned ITO, however, made the addition with the following observation: "I have carefully considered the submission of the asses see, but am unable to accept the same. Where the partners represent themselves in a firm in HUF capacity, any interest paid to them in their individual capacity on eartain deposits is includible to the income of the firm. Such being the position and facts of the case, interest paid to Shri Mangal Sain and Shri Mool Chand in their individual capacity is held as includible to the income of the firm. I have gone through the record of the assessee-firm for the assessment years 1980-81 and 1981-82 and find that such interest was itself included to the income of the firm, while making computation of income ....
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....502." 5. The assessee is now in further appeal before us. Shri P.D. Jain argued on behalf of the assessee and relied upon the following case laws: In the cases of Chhotalal & Co. v. CIT [1984] 150 ITR 276 (Guj.), Terla Yeeraiah, CIT v. Budhalal Amulakhdas [1981] 129 ITR 97 (Guj.), Venkatesh Emporium v. CIT [1982] 137 ITR 593 (Mad.) and Pannalal Hiralal & Co.It was argued on behalf of the assessee that the partners were maintaining two accounts, i.e., (1) on behalf of the HUF, and (2) on their own behalf and that the interest was paid to the partners in their individual capacity and they were representing their HUFs, the provision of section 40(b) of the Income-tax Act, 1961 ('the Act') was inapplicable. According to the learned authorised representative, the learned ITO was not justified to make the addition and the learned AAC further erred in not deleting the unjustifiable additions. 6. On behalf of the revenue the learned departmental representative, Shri S.P. Jain, supported the orders of the authorities below and contended that the existence of two accounts could not prevent the operation of law. According to Shri Jain the case laws relied upon by the learned authoris....
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....hibits in absolute 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 HUF 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 a 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 HUF and had deposited their individual money in the firm." 9. A perusal of the above ratio clearly indicates that the partner no doubt may represent his HUF but the law contemplates that he alone is the partner and the other parties of his HUF had not acquired the status of partner in any manner. The revenue's stand gets support from the ratio in this case. In fact, relying upon this very ratio the Hon'ble Madras High Court subsequently in t....
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....wo accounts does not mean that provision of section 40(b) becomes inoperative or inapplicable. Having two accounts does not mean that the provision was not to be applied. In the case before us the interest was paid to the partner and that too in his individual account and it is not clear as to how the provision of law is inapplicable. On behalf of the assessee reliance was also placed on the ratio in the case of Chhotalal & Co. It is noticed that the Hon'ble Gujarat High Court while deciding the issue perhaps was not informed about the decisions in the cases of London Machinery Co., Dwarkadas Rameshwar Goenka and Sanghi Motors as those cases would appear to have not been referred to in the judgment. With due deference to the Hon'ble Gujarat High Court, we are inclined to infer that the views taken by the other three Hon'ble High Courts we have already discussed are in consonance with the spirit of section 40(b). The assessee thus does not get any support from the finding in the case of Chhotalal & Co. Similarly, the ratio in the case of Terla Veeraiah also is of no help to the assessee as the decision in the case of London Machinery Co. appears to have not been brought to the notic....
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.... those accounts. He added Rs. 14,041 which represented interest to these persons in their individual capacity and added it under section 40(b). The allocation of the shares of the partners as made by the ITO would clarify the position Sl. Name of partner Salary Interest Profit Interest Total No. in dividual capacity 1. Shri Mangal Sain one-third 4,800 - 11 949 - 16,749 2. Shri Mool Cha....
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....bsp; 5,125.50 40,825.90 40,825.90 There was another account of Shri Mool Chand representing his HUF which stood as under: Copy of account of Shri Mool Chand (HUF) Rs Rs To drawings; 31-3-1983 8,889.05 By balance brought forward 1-4-1981 14,845.61 To balance carry forward ....
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....; Rs Rs To balance carry forward 1-4-1981 12,188.01 By share of net profit 31-3-1982 13,675.42 To interest 31-3-1982 1,462.56 To drawings 12,560.00 By balance carry forward 31-3-1982 12,535.15 26,210.57 26,210.57 The AAC did not accept the plea of the assessee that the interest paid to Shri Mangal Sain and Shri Mool Chand in t....
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....dual. Some interest had been credited in the HUF account and it was held that interest could not be added as it was in the account of the partner. A reference was also made to the decision of the Madras High Court in the case of Venkatesh Emporium which was a reverse case. In that case a partner in individual capacity was also a karta of a HUF which had advanced certain moneys to the firm. The interest paid by the firm to the family was credited in a separate account maintained for the family. The question was whether the interest paid in HUFs account could be added. The High Court held that the interest was not paid to the partner and, therefore, it could not be added. 6. The departmental representative besides relying on the decision of the Allahabad High Court in the case of London Machinery Co. further submitted that the decision of the Madras High Court in the case of Venkatesh Emporium was a reverse case and it does not help the case of the assessee, He also relied on the decision of the Delhi High Court in the case of Sanghi Motors. In this case, S was a partner in a firm in his capacity as karta of his HUF. Salary and bonus paid to the partners were being assessed in ind....
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....n his individual capacity will not be disallowed under the abovementioned provisions and vice versa. 8. There is no doubt that the matter has been full of contentions and different views have been taken from time to time by different Courts. I will first take the decision of the Allahabad High Court in the case of London Machinery Co., which has been relied upon by the departmental representative and a reference to that case has also been made in the order of the learned Judicial Member. In this case the first thing to be noted is that there were three partners acting as kartas of their HUFs but the partnership deed provided that no interest shall be paid on the contribution of the capital employed by the HUF unless the partners agree otherwise. Three partners have deposited their individual funds with the firm. Interest was paid in these accounts. Their Lordships held that payment to a person who is a partner has to be disallowed under section 40(b) and the character or capacity in which the payment is made to the partner was not material. If a partner makes a deposit in the form of monies belonging to his HUF and also monies belonging to individually, it is a partner who gives....
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.... following the decision of the Full Bench of the Gujarat High Court and considering the facts of the case, I hold that interest paid in the accounts of Shri Mangal Sain and Shri Mool Chand in their individual accounts could not be added under section 40(b) as the interest paid to the partners. It may be clarified that Shri Mangal Sain's account representing the HUF has also been credited with interest of Rs. 1,462 but the ITO has not referred to that amount in his order though the AAC has referred. 12. There is one more strong reason why the claim of the assessee should be accepted. The provisions of section 40(b) have been amended by adding Explanation 2 which has already been reproduced above. This is a clarificatory amendment as stated in the Board's circular and it is said in the clarification given by the Board that this amendment was made to bring out the legislative intention more clearly so that further controversy and litigation regarding the intents and purports of these provisions is avoided. At the end of this clarification it is stated that such amendments seek to eliminate continued and unnecessary litigation regarding the true import of these provisions. According....
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....resh Chand. Shri Mangal Sain and Shri Mool Chand joined the firm as partners as representatives of their respective HUFs, i.e., Shri Mangal Sain was the karta of a joint family as well as Shri Mool Chand and both of them in their capacity as karta of the joint family joined the firm as partners. In the books of the firm there are personal accounts for Shri Mangal Sain and Shri Mool Chand on which interest was paid by the firm. The interest paid to these personal accounts which amounted to Rs. 14,041 was added back by the ITO under section 40(b) in the assessment of the said firm. The assessee objected to the disallowance of this interest and filed appeal before the AAC. Even though the AAC mentioned that there are individual accounts maintained in the books of the firm both for Shri Mangal Sain and Shri Mool Chand in addition to the accounts maintained in the names of the joint families of Shri Mangal Sain and Shri Mool Chand, he took the view that interest paid to Shri Mangal Sain and Shri Mool Chand in their individual capacity should also be disallowed under section 40(b), In particular, he relied upon a decision of the Gujarat High Court in the case of Sajjanraj Divanchand to f....
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....istinguished the decisions relied upon by the learned Judicial Member and relying upon the language of section 40(b) particularly after it was amended by the Taxation Laws (Amendment) Act, 1984, and the information issued by the Board and placing strong reliance upon a Full Bench decision of the Gujarat High Court reported in Chhotalal & Co.'s case which the learned Judicial Member declined to follow, held that interest paid to individual account was not hit by section 40(b) because the individual was not a partner in the firm. He applied the circular issued by the Board to the facts of this case by pointing out that the amendment made to section 40(b) referred to earlier was stated to be of a clarificatory nature by the Board in its circular and since it was of a clarificatory nature intended to bring out the legislative intention more clearly in order to avoid controversy and litigation, the circular must be held to be applicable to the assessee and, therefore, the interest paid on the individual accounts could not be treated as interest paid to a partner. He drew support for his view from the decision of the Full Bench of the Gujarat High Court. He noticed that there was no deci....
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....hich he is the karta then the interest paid on the moneys lent by the joint family is not liable to be added back under section 40(b). The Andhra Pradesh High Court held in this case that the same principles are applicable in the case of salaries paid to the partners. The observations made by the Andhra Pradesh High Court through Justice Y.V. Anjaneyulu, who spoke for the Court are as under: ". . . We consider that the present case is on all fours with the facts obtaining in the decisions of this Court in Addl. CIT v. Vallamkonda Chinna Balaiah Chetty & Co. [1977] 106 ITR 556 (AP) and Terla Veeraiah v. CIT [1979] 120 ITR 502 (AP). It is true that there is a conflict of judicial opinion on this aspect (vide judgment of the Karnataka, Allahabad and Delhi High Courts above referred to on which reliance was placed by the learned standing counsel for the revenue). We do not think that any case is made out for reconsideration of the judgments of this Court in Addl. CIT v. Vallamkonda Chinna Balaih Chetty & Co. [1977] 106 ITR 556 and Terla Veeraiah v. CIT [1979] 120 ITR 502 for two reasons: firstly, the view taken by this Court finds support in the judgments of the Gujarat High Court a....
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....ations 2 and 3 is brought about to set at rest the controversy. We see no reason to hold that the principle statutorily recognised by Explanations 2 and 3, following the decisions of some High Courts, is good only from the assessment year 1985-86 and ceased to be so for the preceding assessment years. In our opinion, Explanations 2 and 3 are merely clarificatory in character and must, therefore, govern the assessments prior to the assessment year 1985- 86 also." In my opinion the matter is fully governed by the decision of the Andhra Pradesh High Court and the observations extracted above answer fully all the points raised by the revenue against the assessee. I thought I can do no better than to reproduce the above observations. Since it has been held that the amendment brought to section 40(b) is clarificatory in nature and it applies to earlier assessment years also, it must be held that the decision rendered by the Allahabad High Court in London Machinery Co.'s case cannot be said to be correct proposition of law before amendment of section 40(b). For the same reason the decision in Chandu Lal Suraj Pal's case which is a reiteration of the same view as expressed in London Mac....