TaxTMI 
TaxTMI 
2002 (8) TMI 81
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....for the assessment year 1956-57. For and up to the assessment year 1968-69, they were assessed as individuals and with effect from the year 1969-70 they were assessed as a Hindu undivided family. However, the income on which they were assessed arose out of the assets, which were received, on the partition of the joint family and the assessments for all the years should have been made in the assessments of the Hindu undivided family. In connection with the assessment year 1964-65, the Income-tax Officer received information that the partners had accounts in banks, which were not incorporated in the books of the firm. So far as Shri Ram Prasad is concerned he came up with a disclosure petition dated August 9, 1965, disclosing an income of Rs. 76,062, which had escaped assessment and requested that the same be assessed for the assessment years 1956-57 to 1964-65. As per that disclosure he had Rs. 43,919.99 at the end of the financial year 1953-54 which was outside the account books of the firm. Shri Ram Sarup did not make any disclosure petition. In his case, it was found that there were deposits in the bank in 1954 to the extent of Rs. 34,200 as under: &nbs....
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....edited) and the accounts subsequently opened were treated as loan accounts (in which interest was charged from the firm). However, the entire income by way of profit and interest from the firm was assessed in the hands of the two partners. Shri Ram Prasad in his disclosure petition dated August 9, 1965, stated that he was a partner in the firm, Bhagwati Prasad Ram Sarup, and that at the time of his marriage he had received substantial amounts from far and near relations in the shape of silver coins, which were kept with his wife and later on sold for Rs. 40,000. He stated that he believed that this Rs. 40,000 was his wife's exclusive property. He further stated that with this amount he purchased and sold bidis and the money earned from bidi business was kept with his wife. He added that although he had a bona fide belief that this money was his wife's exclusive property but since he had no evidence to prove his claim, he was offering a sum of Rs. 76,062 for assessment. This amount was offered for assessment in his own assessment in which the income from the firm (which was undoubtedly the joint family income) was being assessed. This income was offered for being assessed as joint f....
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....he assessments of the partners were made for some time in the status of individuals, the assessee could not claim that interest was their individual income. On further appeal before the Appellate Tribunal, the assessee took the stand that these two partners were carrying on some individual business and that they made disclosure petitions, which were not accepted, and the nature and source of the deposits made by them were also not explained. Accepting the above contention of the assessee, the Tribunal observed that this showed that they were having some other undisclosed sources of income, but that certainly it was not from the firm; that there could be no presumption that in a joint Hindu family the business carried on by a coparcener belonged to the family and that the coparceners could carry on their individual business as well. The Tribunal further observed that there could be no presumption that the other business, which these persons were carrying on, also belonged to the family. The Tribunal further observed that it was from the assessment year 1966-67 that these two partners opened their individual account in the books of the firm and interest was being paid on that account....
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....lowance of payment by way of interest, bonus, commission or remuneration made by a firm to any of its partners is not permissible and this is an absolute prohibition. In the result, the same was added back in the income of the assessee. It appears that up to the assessment year 1951-52 it was done in the status of a Hindu undivided family and thereafter a partition took place in the family and the firm was constituted. In the assessment year 1952-53, the partition was accepted. It was clearly recorded in the findings of the Income-tax Appellate Tribunal referring to the final order of the respective Appellate Assistant Commissioner of Income-tax. It was submitted on behalf of the Revenue that no evidence was adduced at that time that the partner had any individual business. On the basis of this fact, the Tribunal held that no such inference could be drawn that it was Hindu undivided family account as no withdrawals were made except for personal expenses and as such the said view of the Appellate Assistant Commissioner of Income-tax was not accepted. Referring to the Income-tax Officer's order in the assessment year 1968-69 in the case of Shri Ram Prasad, it was stated that no in....
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....act of partnership with another person or persons. The karta of the Hindu undivided family, however, may and frequently does enter into partnership with outsiders on behalf and for the benefit of his joint family. But when he does so, the other members of the family do not, vis-a-vis the outsiders, become partners in the firm. They cannot interfere in the management of the firm or claim any account of the partnership business or exercise any of the rights of partners. So far as outsiders are concerned, it is the karta, who alone is, and is in law recognised, as the partner. Whether in entering into partnership with outsiders the karta acted in his individual capacity and for his own benefit, or he did so as representing his joint family and for its benefit, is a question of fact. In the instant case, there is no dispute that Prahladrai entered into the partnership representing his joint family and for the benefit of that family. But although that is so, the relationship between the partnership and Prahladrai was that of an individual appointed as a partner. The partnership was not in any way concerned with the fiduciary relationship in which Prahladrai stood with the family, which ....
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.... of interest, salary, bonus, commission or remuneration made by the firm to any partner of the firm. Explanation 1.-Where interest is paid by a firm to any partner of the firm who has also paid interest to the firm, the amount of interest to be disallowed under this clause shall be limited to the amount by which the payment of interest by the firm to the partner exceeds the payment of interest by the partner to the firm. 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 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 purposes of this clause. Explanati....
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.... (31) of section 2. It pointed out that the definition shows clearly that an individual, a Hindu undivided family and a firm are distinct persons/entities for the purpose of the Income-tax Act. The High Court, therefore, concluded that since an individual and a Hindu undivided family are two distinct entities for the purpose of the Act, clause (b) of section 40 has no application where the interest is paid to the partner on deposits made by him with the firm in his individual capacity where such person is a partner not in his individual capacity but as representing a Hindu undivided family. Sri G. C. Sharma, learned counsel for the appellant-assessee, strongly relies upon this decision and commends it for our acceptance. Learned counsel points out that even before the enactment of the Taxation Laws (Amendment) Act, 1984 (which inserted Explanation 2 aforesaid), a majority of the High Courts in the country had taken the same view though a few High Courts have no doubt taken a contrary view. Looked at from any angle, Sri Sharma says, the issue must be answered in favour of the assessee. Clause (b) of section 40 is based upon and is a recognition of the basic nature of the relation....