COMMISSIONER OF INCOME TAX Vs. COLOMBO STORES

JUDGEMENT

(1.) THE assessee is a registered firm. One Seeniappa Nadar was partner in the said firm till his death on November 17, 1972. He had earmarked certain amounts in his capital account in the partnership books to his grandsons by a will executed by him on September 21, 1970. In the will he has stated that the said amount should taken by his son, Kalidasan, as the trustee, that he should take charge of the sum, improve it and hold it on behalf of his sons who were living or who may be born thereafter and that he should divide the amounts among his sons after the last son attained the age of eighteen. After the death of Seeniappa Nadar, the amounts standing to the credit of the deceased were transferred to the account of the estate of the deceased. For the amounts standing to the credit of the estate of the deceased, interest has been credited to the estate of the deceased. Kalidasan, the trustee appointed under the will of Seeniappa, was not a partner in the firm, but his two minor sons, Karunakaran and Kartikeyan, have been admitted to the benefits of the partnership firm. On these facts, the ITO held that the interest of Rs. 12,838 credited to the account of the estate of the late Seeniappa was factually interest payable to the above-said two partners, namely, Karunakaran and Kartikeyan, and, therefore, the said amount cannot be allowed as a deduction in view of s. 40(b) of the Income-tax Act.

(2.) THE assessee went on appeal to the AAC contending that the payment of interest is not to the minors, but to the estate of the deceased Seeniappa Nadar which is in the hands of the trustee and that, therefore, it should not be taken to be payment of interest to the minors who have been admitted to the benefits of the partnership. THE AAC held that as the payment of interest was made to Kalidasan in his capacity as the trustee and the minors were not entitled to the interest in the year of account, the said amount of Rs. 12,838 is deductible. THE Revenue took the matter on appeal to the Tribunal. THE Tribunal also held that the payment of interest was not to the minor partners, that, therefore, s. 40(b) will not come into play and as such the assessee is entitled to the deduction of the interest paid to Kalidasan, the trustee. Aggrieved by the decision of the Tribunal, the Revenue sought and obtained a reference on the following question :

(3.) AS the payment of interest has been made in this case not to the minor partners, but to the estate in the hands of the trustee who is administering the estate, s. 40(b) cannot be invoked. The result is that the assessee will be entitled to the deduction of interest in a sum of Rs. 12,838. The question referred to us is, accordingly, answered in the negative and in favour of the assessee. The assessee will get the costs from the Revenue. Counsel's fee Rs. 500.