DWARKADAS RAMESHWAR GOENKA Vs. COMMISSIONER OF INCOME TAX

JUDGEMENT

(1.) THE assessee is a registered firm carrying on business of trading in cotton piece goods. THE firm consisted of seven partners. In completing the assessment, the ITO disallowed interest payments to the tune of Rs. 10,164 to Shiv Bhagwan Goenka and Rs. 2,586 to Omprakash Goenka under s. 40(b) of the I.T. Act. THE assessee claimed that these payments were made to these persons in their capacity as individuals whereas they were partners in the firm representing their HUF. THE ITO held that any payment of interest to the partners has to be disallowed under s. 40(b). This view was confirmed on appeal by the AAC and by the Tribunal on further appeal. At the instance of the assessee, the following question has been referred :

(2.) THE learned counsel for the assessee strenuously contended that there was no dispute that the capital invested by the said two partners were the joint family assets and that they were partners in the firm as kartas of their respective HUFs. THE share income of the individual is also returned as the HUF income and, in the circumstances, the interest paid should be deemed to be payments to the HUF as such and not to any partner as an individual. It is now well settled that when the karta of a joint Hindu family enters into a partnership with strangers, the members of the family do not ipso facto become partners in that firm. THEy have no right to take part in its management or to sue for its dissolution. THE creditors of the firm would no doubt be entitled to proceed against the joint family assets including the shares of the non-partner coparceners for realisation of their debts. But that is because under the Hindu law, the karta has the right when properly carrying on business to pledge the credit of the joint family to the extent of its assets, and not because the junior members become partners in the business [vide Firm Bhagat Ram Mohanlal v. CEPT ]. THE Supreme Court in a later decision in CIT v. Bagyalakshmi & Co. (1965) 55 ITR 660, 664 also observed :