VENKATESH EMPORIUM Vs. COMMISSIONER OF INCOME TAX

JUDGEMENT

(1.) THE assessee in these cases is a firm by name M/s. Venkatesh Emporium. THE firm consists of three partners of whom K. Venkatesan is one with a 40% share therin. He is a partner in his individual capacity and has 40% share in the partnership profits. He happens to be the karta of an HUF. But the finding of the Tribunal is that he is a partner in Venkatesh Emporium only in his individual capacity and not as karta of the HUF. It appears that the HUF had advanced loans to the firm on interest. In respect of these loans, interest was being paid or credited by the firm of Venkatesh Emporium to the HUF. THE interest was credit in a separate folio in the firm's account books and maintained for the HUF of Venkatesan. THE firm deducted the interest paid to Venkatesan's joint family as an item of outgoing in making up its profit and loss account. THE ITO, however, invoked s. 40(b) of the I.T. Act, 1961, and added back the interest so claimed while computing the taxable income of the firm. THE amounts added back were Rs. 4,997, Rs. 7,625 and Rs. 14,872 for the assessment years 1971-72, 1972-73 and 1973-74, respectively. THE officer took the view that since the payment of interest was made to Venkatesan as karta of the creditor family and since Venkatesan was a partner, the interest paid must be held to be a payment made to the partner and hence not deductible in terms of s. 40(b) of the I.T. Act. THE AAC on appeal, confirmed the decision of the ITO. On further appeal by the assessee, the Appellate Tribunal also held that the ITO was correct in adding back in the firm's assessments, the interest paid to the HUF of the partner, Venkatesan. THEy expressed the view that s. 40(b) enacts an absolute prohibition, prohibiting the payment of interest to a partner in whatever capacity he might receive such interest.

(2.) IN this reference, at the instance of the assessee, we are asked to consider the correctness of the Tribunal's decision on the following question of law :

(3.) MR. J. Jayaraman, learned standing counsel for the I.T. department, submitted that the advances to the firm in this case cannot, in the eye of law, be regarded as having been effect by an HUF. His thesis was that for all legal purposes, the advances made by any joint family must be held to have been made only by the karta, and, in this case, by Venkatesan. It was but a step in his argument to point out that he was the partner of the firm and the payment is caught by s. 40(b). Learned counsel cited Ram Laxman Sugar Mills v. CIT , to support the position that a Hindu joint family is not a legal entity, such as might enter into dealings as such. Learned counsel submitted that although colloquially the HUF may be said to have advanced the moneys to the assessee-firm in this case and although the firm's accountants had opened a separate folio for the family in the firm's account books, yet in a purely legal sense the advances must be treated as having been made only by Venkatesan.