TaxTMI 
TaxTMI 
1974 (7) TMI 59
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....tindra M. Khatiwala 365 1,316 HUF of which Jyotindra Was Karta on HUF's Deposit account 2 Mohanlal C. Khatiwala Kerta of his HUF 377 2,851 Mohanalal, on his Individual Deposit account 3 Chimanlal C. Khatiwala as Karta of HUF 11,108 9,984 Chimanlal, on his individual deposit account. 4 Bharat H. Khatiwala as member of the HUF of Hiralal C. Khatiwala. 9,043 — . . . 20,893 14,151 . 2. The account year concerned are S. Y. 2025 (22nd Oct., 1968 to 9th Nov., 1969) and S.Y. 2026 (10th Nov., 1969 to 30th Oct., 1970) relevant to the asst. yrs. 1970-71 and 1971-72 respectively. There was an earlier partnership deed dt. 23rd April, 1964 between 10 partners of whom Shri Hiralal r....
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....e Rs. 10,000 each towards the Fixed Capital of the Partnership, whereas the parties of the First and Fifth Parts hereto shall contribute Rs. 80,000 each towards the Fixed Capital of the partnership. That, therefore, the Fixed Capital of this Partnership shall be Rs. 2,40,000. And that as and when necessary the Parties hereto shall bring in additional capital required by the Partnership." No interest was paid on the partner's capital. 4. Cl. (6) of the Partnership Deed dt. 2nd April, 1969 provided for capital contribution as follows: "(6) That the parties of all the parts hereto except the parties of the Fourth and Seventh Parts hereto shall contribute Rs. 10,000 each towards the Fixed Capital of the Partnership. That, however, the ....
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....970-71 and Rs. 14,351 for the asst. yr. 1971-72 in computing the business income of the assessee firm. Thereupon the ITO apportioned under s. 158 the income, assessed on the firm between the above partners under: Asst. yr. 1970-71 . . Profits Salary Interest 1. Jyotindra (Individual) 34,383 13,050 395 2. Mohanlal (HUF) 30,624 13,050 377 3. Chimanlal (HUF) 30,624 13,050 — 4. Bharat (HUF) 19,346 5,000 9,045 . . . . 9,817 The ITO apportioned interest of Rs. 11,108 paid by the firm to Chimanlal in his individual deposit account against the other partner Champaklal C. Khatiwala, perhaps erroneously. Asst. yr. 1971-72 . . Profit Salary....
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..... In the above cases, the question was whether salary paid by a firm to the partner-Karta representing the HUF was allowable deduction in the assessment of the firm or not, and it was held that the payment of salary by the firm to the partner of the firm was not an allowable deduction, whether the partner received the salary in his individual capacity or in his capacity as Karta of the HUF. That was so because salary was payable by the firm for services rendered and the services had of necessity to be rendered by the partner Karta whether as representing the HUF or as an individual. The position in regard to interest payable by the firm on borrowed funds is, however, different, because these funds can flow from several distinct and identifi....
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....irm merely because "A" is a partner in the firm representing his large HUF. We do not think so. In our opinion in such a case, only the first category of interest paid by the firm to the larger HUF whom "A" represents in the firm as partner could be disallowed under s. 40 (b) and not other four categories of interest paid by the firm to "A" on funds invested by him in different and distinct capacities, other wise strange anomalies in taxation would arise. For example, the entire interest paid to "A" in the above case would be apportioned to him under s. 158 and would in terms of s. 67(1) constitute his share in the income of the firm and would become taxable in his hands even though such interest is really the income received by "A" in five....