RAHIM KHATOON Vs. COMMISSIONER OF INCOME TAX

JUDGEMENT

(1.) At the instance of the assessee, the following two questions were referred by the Income-tax Appellate Tribunal to this court for its opinion, under section 256(1) of the Income-tax Act, 1961 (Act No. 43 of 1961) (which will hereinafter be referred to as "the Act") :

(2.) The assessee is a partner of M/s. Kamal Enterprises and the extent of her share is 25%. The partnership firm has seven partners including the assessee. One of the Partners is a minor - she is the daughter of the assessee - and the extent of her interest in the partnership business in 25%. The partnership firm is running a cinema theatre, M/s. Kamal Talkies, taken on lease. The talkies originally belonged to one Jainarayana Misra who sold it to one Hashmatunnisa Begum on 1/09/1966 subject to re-conveyance of the same in his favour or in favour of his nominees on payment of Rs. 4,00,000 before 30/08/1974. Jainarayana Misra executed a registered deed dated 19/09/1970, assigning the right to repurchase it is favour of Shri Gaffar Jaji Shukur and three others, who, in turn, entered into an agreement to assign their rights or interests in favour of M/s. Kamal Enterprises for a consideration of Rs. 1,25,000. A separate agreement was executed on 8/01/1971, between M/s. Hashmatunnisa Begum and the seven persons who subsequently became the partners of the partnership firm, known as "M/s. Kamal Enterprises", stipulating that out of the consideration of Rs. 4,00,000, half of it, namely Rs. 2,00,000, was to be paid immediately and the balance in five instalments. In terms of this agreement, Smt. Hashmatunnisa Begum should reconvey the theatre to the firm immediately on receipt of the last instalment. On the same day, i.e., 8/01/1971, a partnership deed was executed amongst the seven purchasers. The extent of the share of the assessee herein the partnership business is 25%, her minor daughter has a share of 25% and the other five partners, each 10% share.

(3.) In respect of the previous year relevant to the assessment year 1972-73, the individual income of the assessee and her minor daughter was subjected to tax by the Income-tax Officer. During the assessment proceedings, he allowed a deduction of Rs. 24,000, which was paid by way of interest by the assessee, Smt. Rahim Khatoon, to Smt. Hashmatunnisa Begum, the original owner of the theatre. The Income-tax Officer permitted deduction of this amount and that order of the Income-tax on 8/02/1977, in exercise of his power under section 263 of the Act. The Commissioner was of the view that from the terms of the partnership deed dated 8/01/1971, the property was intended to be acquired by the firm. The books of account of the firm, M/s. Kamal Enterprises, disclosed that a total amount of Rs. 4,00,000 was due to Smt. Hashmatunnisa Begum and out of it only Rs. 2,00,000 was paid and in respect of the balance amount Smt. Hashmatunnisa Begum was shown as a creditor. From the agreement dated 8/01/1971, executed between the seven individuals who subsequently constituted the partnership firm, known an "M/s. Kamal Enterprises", and the partnership deed dated 8/01/1971, according to the Commissioner, it was clear that the firm was intended to be the owner of the property and not the partners individually. Since the privity of contract was between the owner, Hashmatunnisa Begum, and the firm represented by all the partners, it was not possible to treat the amount due to Hashmatunnisa Begum by the firm as capital borrowed by the assessee for investing the same in the firm. In that view, the Commissioner held that the Income-tax Officer erred in allowing the interest payment of Rs. 24,000 while assessing the share income of the assessee in respect of her share in the partnership business of M/s. Kamal Enterprises. Pursuant to the revisional order of the Commissioner, the Income-tax Officer passed a revised order disallowing the claim. The Income-tax Appellate Tribunal on appeal, held that section 67(3) of the Act was not applicable. The entries in the books of account militated against the contention of the assessee as regards the applicability of section 67(3). The Tribunal also was of the view that