VRAJLAL TRIKAMLAL Vs. COMMISSIONER OF INCOME TAX

JUDGEMENT

(1.) THIS reference arises out of assessment to income tax made on a firm called M/s Vrajlal Trikamlal for the asst. year 1962 63, the corresponding account year being Samvat year 2017. Prior to his death, which occurred on 29th May, 1949, one Vrajlal Trikamlal was a partner in the assessee firm and at the time of his death, there was a certain credit balance in his account in the books of account of the assessee firm. Vrajlal Trikamlal died without leaving a widow or any children with the result that his brother, Mulchand Trikamlal, inherited the properties left by him as his only heir. On the death of Vrajlal Trikamlal, Mulchand Trikamlal was admitted as a partner in the assessee firm but the credit balance in the account of Vrajlal Trikamlal in the books of account of the assessee firm continued to stand in the same name. Every year, the assessee firm credited interest in the account standing in the name of Vrajlal Trikamlal and such interest was shown by Mulchand Trikamlal in his personal assessment and it was taxed as his personal income on the footing that the credit balance in the account of Vrajlal Trikamlal belonged to him as his separate property. The assessee firm also on the same footing treated interest credited in the account of Vrajlal Trikamlal as interest paid to Mulchand Trikamlal and such interest was disallowed as an impermissible deduction in the assessment of the assessee firm on the ground that it represented interest paid to a partner. This state of affairs continued up to the asst. year 1956 57. Even for the asst. year 1957 58, Mulchand Trikamlal had filed his return on the same basis, but before the assessment could be completed, he addressed a letter dated 18th October, 1957, to the ITO submitting a revised return showing interest credited in the account of Vrajlal Trikamlal as income belonging to the HUF of himself and his two sons. He pointed out that he had made a mistake in showing interest received in the account of Vrajlal Trikamlal as his personal income and took up the stand that it was income belonging to the joint Hindu family consisting of himself and his two sons. The reason for which he took up this stand was, to quote from his own letter :

(2.) IT appears that the assessee firm had also submitted its return for the asst. year 1957 58, and an assessment order had already been passed disallowing deduction of interest paid in the account of Vrajlal Trikamlal on the ground that it represented interest paid to a partner. Mulchand Trikamlal, therefore, addressed a letter dated 25th October, 1958, to the ITO requesting him to rectify the assessment of the assessee firm for the asst. year 1957 58, by treating interest paid in the account of Vrajlal Trikamlal as interest paid not to a partner, but to the HUF of Mulchand Trikamlal. Mulchand Trikamlal also filed a declaration dated 31st October, 1958, stating that, on the death of Vrajlal Trikamlal, "his capital in the firm of M/s Vrajlal Trikamlal has been inherited by us, i.e., my sons and myself and the said capital has become the property of our joint Hindu family, after the death of my elder brother" but "until now, i.e., Samvat year 2011, through oversight, I have shown the interest on the said account in my personal income". The ITO accepted the contention of Mulchand Trikamlal that the credit balance standing in the account of Vrajlal Trikamlal was the joint family property of Mulchand Trikamlal and his two sons, and treated interest received in the account of Vrajlal Trikamlal as income belonging to the HUF of Mulchand Trikamlal and allowed it as deduction in computing the profits and gains of the assessee firm for the asst. year 1957 58. The assessments for the subsequent years up to the asst. year 1962 63 were also made on the same footing : the amount of interest credited in the account of Vrajlal Trikamlal was assessed as income of the HUF of Mulchand Trikamlal and it was allowed as deductible expenditure in the assessment of the assessee firm.

(3.) THE two sons of Mulchand Trikamlal reiterated this statement in their respective affidavits: