COMMISSIONER OF INCOME TAX Vs. VEERIAH REDDIAR S

JUDGEMENT

(1.) THESE two references cover the assessment years 1981-82 and 1982-83 expecting answer to the following common question in regard to them :

(2.) SECTION 40(b) of the Income-tax Act, 1961, is analogous in content to the provisions of SECTION 10(4)(b) of the Indian Income-tax Act, 1922. The statutory provision relates to situations relating to the amounts that was not to be deducted in computing the income chargeable under the head "Profits and gains of business or profession". In regard to this situation, in the case of any firm in accordance with the provisions of SECTION 40(b) of the Act, any payment of interest, salary, bonus, commission or remuneration made by the firm to any partner of the firm cannot be claimed to be deducted in computing the income chargeable under the aforesaid head. Therefore, the question is as to whether the partnership firm in question is concerned with the payment of interest to any partner of the firm or to any other person in the context, may be the same individual in more than one capacity. The amount in question is Rs. 86,400 consisting of interest at the rate of 12 per cent per annum with regard to the deposit of Rs. 7,20,000 made by Sri Ramachandran, one of the partners of the firm. The rival contentions are relating to the position as to whether the deposit concerns Sri Ramachandran as an individual in his capacity as the karta of the Hindu undivided family or in his capacity as the partner of the firm.

(3.) THE first appellate authority considered the question in paragraph 5 of its order. THE said authority observed that applicability of section 40(b) to payment made to partners proceeded on the basis that the eyes of the seeker need travel no further than to ascertain the status of the recipient of interest and if that person were to be a partner in whatever capacity, the prohibition enjoined by Section 40(b) will apply. THE said authority observed that this was the settled position for a long time. THE authority further observed that the Andhra Pradesh High Court in Addl. CIT v. Vallamkonda Chinna Balaiah Chetty [1977] 106 ITR 556, as well as the Gujarat High Court in Chhotalal and Co. v. CIT [1984] 150 ITR 276 [FB], took the view that the status or character of the recipient of interest paid by the partnership firm should be noticed and where the interest was paid to an individual for the advances made by him in his capacity representing the Hindu undivided family, payment of interest can be allowed as a deduction. Payment of interest on amounts lent to the partnership firm can be traced either to the individual or even to a representative body with reference to the nature of the funds advanced. THE situation is different with reference to the work or labour put in by one of the partners because such a partner works in the firm and receives salary as an individual or as a representative of the family cannot be known from the way he functions and, therefore, payment of salary must stand on a different footing.