COMMISSIONER OF INCOME TAX Vs. JAGDISH MEDICAL HALL

JUDGEMENT

(1.) THE Tribunal, New Delhi, has referred the following identical question of law for the asst. yrs. 1978 -79 and 1979 -80 under s. 256(1) of the IT Act, 1961 (hereinafter referred to as 'the Act') for opinion to this Court : "Whether, on the facts and in the circumstances of the case, the Tribunal was legally correct in holding that the interest payments amounting to Rs. 14,400 were not hit by s. 40(b) of the IT Act, 1961 -

(2.) BRIEFLY stated, the facts giving rise to the present writ petition (sic) are as follows : The respondent -assessee firm derived income from purchase and sale of the medicine. The ITO found that the respondent -assessee had paid interest to the following AOPs : 1. M/s Jagdish Chand Investors Rs. Corporation 7,200 2. M/s Hukum Chand Investors Rs. Corporation 7,200

(3.) THE ITO found that Sri Jagdish Chand and Sri Hukum Chand were partners in the firm having 45 per cent and 55 per cent shares, respectively in the profits and that the interest paid in the name of AOP was, in fact, interest paid to the partners themselves and, therefore, he disallowed this amount of interest under s. 40(b) of the Act. In appeal, the AAC found that there were deposits of Rs. 40,000 each in the two accounts in the name of M/s Jagdish Chand Investors Corporation and M/s Hukum Chand Investors Corporation and these were transferred to these accounts after debiting it to the partners' accounts. He further found that these accounts were in respect of the AOP consisting of Sarvsri Jagdish Chand, Hukum Chand and Lajpat Rai. The other one was the AOP of Sri Jagdish Chand. The AAC held that this was nothing but interest paid to the partners and AOP had no source of income or business activity and, thus, confirmed the disallowance. In appeal, the Tribunal found that the AOP were doing business of investors and financiers. It was contended that the interest was not paid to the partners but to the AOP who were different entity. It was, therefore, held that the interest could not be disallowed under s. 40(b) of the Act.