SHENBAGAM AUTO WORKS Vs. COMMISSIONER OF INCOME TAX

JUDGEMENT

(1.) AT the instance of the assessee, the following five questions of law have been referred to us for the assessment year 1981-82 for our opinion :

(2.) THERE were two firms by name Shenbagam Auto Works, Madurai, and Shenbagam Tractors, Madurai. One R. Ratnasabai was a partner in Shenbagam Auto Works and one Sri P. V. Parthasarathy was a partner in both the firms representing their bigger Hindu undivided families. For the assessment year 1981-82, the firm paid interest to the partners on several accounts, viz., Hindu undivided family (major), individual and Hindu undivided family (smaller Hindu undivided family). The firm, while returning the income for the said assessment year, added back the interest paid to the partners in respect of the Hindu undivided family (major) and individual accounts. The Income-tax Officer, while computing the income of the assessee-firm, invoked the provision of Section 40(b) of the Income-tax Act, and disallowed the interest paid to the smaller Hindu undivided family. A sum of Rs. 5,663 paid to Sri Ratnasabai and Rs. 1,419 paid to Sri P. V. Parthasarathy in the case of Shenbagam Auto Works, Madurai, were disallowed by the Income-tax Officer, and in the same manner, he disallowed the interest paid to the smaller Hindu undivided family in the other firm.

(3.) WE are of the opinion that in view of the clear language employed in Explanation 2 to Section 40(b) of the Act and in view of the finding that only the bigger Hindu undivided family was a partner in the two firms, there is no scope for application of the provisions of Section 40(b) of the Act, in so far as the interest paid by the firm to the karta of the smaller Hindu undivided family, is concerned. In our view, the view of the Appellate Tribunal that the provisions of Section 40(b) of the Act are attracted is erroneous.