KOTUMAL GHANSHYAMDAS Vs. COMMISSIONER OF INCOME TAX

JUDGEMENT

(1.) BY this reference under S. 256(1) of the IT Act, 1961, the Tribunal has referred the following questions of law at the instance of the assessee for opinion of this Court :

(2.) THIS IT reference relates to the asst. yrs. 1974 -75 to 1979 -80. At the material time, there were three partners in the firm of the assessee, namely, Ghanshyamdas Kotumal, Gopaldas Ghanshyamdas and Ramesh Ghanshyamdas. Each one of them was a partner in the assessee's firm in a representative capacity as a Karta of his HUF. In the books of account of the assessee's firm the said Ghanshyamdas Kotumal, Gopaldas Ghanshyamdas and Ramesh Ghanshyamdas had deposited amounts belonging to them in their individual capacities. The amounts of interest paid by the assessee's firm on these deposits were claimed as deduction. The ITO disallowed the assessee's claim under S. 40(b) of the IT Act, 1961. On appeal by the assessee before the AAC for the first five years and before the CIT(A) for the last year, the AAC/CIT(A) declined to make any distinction in the capacity in which the moneys were invested by the partners in the assessee's firm and upheld the order of the ITO. On further appeal before the Tribunal, the Tribunal held that no interference was called for.

(3.) A partnership is a creature of contract. Under Hindu Law a joint family is one of status. The Income -tax law gives the ITO power to assess the income of a person in the manner provided by the IT Act, 1961. A contract of partnership has no concern with the obligation of the partners to others in respect of their shares in profit in the partnership. It only regulates the rights and liabilities of the partners. A partner may be the Karta of a joint Hindu family or he may be a trustee. He occupies a dual position. Qua the partnership, he functions in his personal capacity; qua the third parties, in his representative capacity. This dual position of a partner "qua the partnership" and "qua the third parties" is clearly recognized by the Supreme Court in CIT vs. Bagyalakshmi & Co. (1965) 55 ITR 660 (SC). In the case of CIT vs. Jhabarmal Agarwalla (1990) 88 CTR (Gau) 14 : (1990) 184 ITR 431 (Gau), a Division Bench of Gauhati High Court, of which one of us (Dr. B.P. Saraf, J.) was member, after considering the decision of the Supreme Court in CIT vs. Bagyalakshmi (supra) and also of the Allahabad High Court in the case of Madho Prasad vs. CIT 1976 CTR (All) 334 : (1978) 112 ITR 492 (All) has held that in a case where the Karta of an HUF is a partner in his representative capacity, the income does not arise to him. The income arises to the HUF and, by virtue of the provisions of the IT Act, 1961, it is assessable in the hands of the HUF. We are in agreement with the view taken in that case by the Gauhati High Court.