COMMISSIONER OF INCOME TAX Vs. THULASIDAR AND CO

JUDGEMENT

(1.) IN compliance with the direction of this Court in TCP No. 342 of 1982 dt. 4th April, 1983 the Tribunal referred the following question for the opinion of this Court under s. 256(2) of the IT Act, 1961, hereinafter referred to as the Act :

(2.) THE assessee is a partnership firm and the assessment involved is 1979-80. For the previous year being the calendar year ended with 31st Dec., 1978 the assessee-firm had no bank account of its own. Mr. Pooniah, who was a partner, was previously carrying on identical business as carried on by the assessee. After the conversion of the business into partnership, no separate bank account was opened by the firm. All the transaction of the firm were put through the bank account in the name of Mr. Pooniah. In respect of such transactions of the firm a sum of Rs. 75,439 was paid by the firm to the partner Pooniah. According to the assessee, since the partnership firm has no account of its own in the bank, the accounts were operated through Mr. Pooniah, who was having the bank account. According to the assessee, inasmuch as the partner Ponniah advanced the amount borrowed from the bank for the purpose of the business of the firm, the interest was paid to the bank through Mr. Ponniah. Hence no interest was paid to the partner. THErefore, according to the assessee, s. 40(b) would not be applicable to the facts of this case. However, the ITO did not accept this explanation offered by the assessee. THE ITO disallowed the payment of interest of Rs. 75,439 since it is hit by s. 40(b) of the Act. According to the ITO there is no nexus between the partnership firm and the bank in the matter of borrowing the amount. Insofar as the bank is concerned, Ponniah is the partner and borrowed the amount from the bank. THEreafter it was said, he was advancing the amount to the firm. Hence there is no direct link between the partnership firm and the Bank in the matter of monetary transaction. THErefore, the ITO came to the conclusion that the interest was paid to the partner and, therefore, it was disallowed under s. 40(b) of the Act. Aggrieved, the assessee filed an appeal before the CIT(A). THE CIT(A) also agreed with the view taken by the ITO in disallowing a sum of Rs. 75,439 under s. 40(b) of the Act.

(3.) IN the partnership agreement cl. (8)(b) states that the partner shall also have the right to operate bank accounts opened in the name of the firm to purchase or sell on behalf of the firm. As per the partnership deed, the partnership firm is directed to maintain accounts and a balance-sheet shall be prepared in accordance with the profit and loss account statement. Two account-books and the balance sheet were produced but in those documents there is no mention with regard to the borrowal of the amounts from the bank or payment of any interest to the bank as such. But the firm's account would go to show that the amount was borrowed through the partner Ponniah and the interest thereon was paid to him. Under such circumstances, in the absence of any evidence on the side of the assessee-firm to show that the amount was really borrowed from the bank and the interest was paid only to the bank and not to the partner Mr. Ponniah, it is not possible to accept the case put forward by the assessee-firm that the provisions of s. 40(b) cannot be made applicable to the facts of this case. The Tribunal in its order said that there is implied authority on the partners to borrow the amount for the business of the firm. But, this statement made by the Tribunal is not in accordance with the clause contained in the partnership deed. As already pointed out, in cl. (8) it is clearly stated that the partner shall also have the right to operate the bank account opened in the name of the firm. IN the present case no such account was opened in the name of the firm.