1. The assessee, Rupchand, is a partner in a partnership firm, M/s. Prabhudas Parasram, and he earns share income from the said firm by virtue of his being a partner. The capital invested in the firm by Rupchand belonged to the HUF of Rupchand and the other members of his family, out of whom, three were his sons, one was his wife and one was his daughter. There was a partition in the HUF of Rupchand, at which the shares of the other members of the family, i.e., his two minor sons and his wife were separated and an amount of Rs. 5,000 was provided by way of provision for marriage and maintenance of the minor daughter. Though the amounts which were received by the family members of Rupchand were retained in the firm, M/s. Prabhudas Parasram, separate entries in respect of their respective amounts came to be made in the account books of the partnership firm. One of the terms of the partition deed, which is annex 'B', is as follows:
'As per the scheme and the terms of partition, it was mutually agreed between the coparceners and the members of the family considering the interest of minor that after partition Shri Rupchand, son of Prabhudas, should continue to be, a partner in the firm, M/s. Prabhudas Parasram, in his individualistic rights with a liability to pay interest on the equivalent amount of capital received on partition by other members and coparceners.'
2. In the assessment proceedings for the assessment years 1974-75 and 1975-76, Rupchand claimed a deduction in respect of interest paid by him to the respective members of the erstwhile HUF from out of his share income from the partnership firm. The ITO, however, held that an agreement to pay interest to the family members as a result of partition cannot hold an overriding title on the share income of Shri Rupchand from M/s. Prabhudas Parasram, as there was no agreement between a firm and the HUF of Shri Rupchand. Thus, holding that there was no overriding title resulting in a diversion of income in favour of the other members of the HUF the entire amount of the share income was treated as the income of the assessee.
3. When the assessee filed appeals against the orders of the ITO for the two years in question, the AAC considered in detail the effect of the partition and understood the agreement contained in the partition deed, by which Rupchand was required to pay interest to the divided members, as bringing about a charge on his share income. He took the view that, understood in the proper perspective, 'the amounts credited to different members on partition are nothing but the loan arranged by the appellant-partner from outsiders for investment in the partnership as from the date of partition, i.e., Diwali 1972' and, thus, there was an overriding title to part with the interest out of the share income of the appellant before the ascertainment of his income. The deduction of Rs. 11,424 paid as interest to other separated members of the family was thus permitted by the AAC. The matter was taken to the Tribunal by the department in two separate appeals which were decided by a common order. The Tribunal noticed the entries produced before it and held that 'according to the entries produced before me, it is a clear indication that such separated or divided member was the owner of his/her share and, therefore, he/she was entitled to the interest which was received on his/her behalf by Shri Rupchand' and this was, therefore, a clear-our case of overriding title. Further, holding that there was nothing on record to show that Rupchand borrowed money from the divided members of his erstwhile HUF, the Tribunal held that s. 67(3) of the I.T. Act has no application to the facts of the case.
4. Arising out of this order of the Tribunal, the following question has been referred to this court at the instance of the revenue under s. 256(1) of the I.T. Act:
'Whether, on the facts and in the circumstances of the case, the Tribunal is justified in holding that there was an overriding title created ?'
5. Shri Joshi, appearing on behalf of the revenue, has based his argument on the terms of cl. 3 of the partition deed dated October 14, 1976, reproduced earlier. According to the learned counsel, Rupchand was permitted to continue as a partner in the firm of M/s. Prabhudas Parasram in his individual capacity and the liability which he took to pay interest on the equivalent amount of capital which continued with the partnership firm was a liability taken by him individually and such liability to pay interest did not create any overriding title over the share income received by the assessee. In other words, what is contended is that the real nature and character of the share income received by the assessee remained the same and interest paid by the assessee to the other members of the erstwhile joint family really amounted to an application of the amount of interest so received with the result that the liability so created by clause 3 of the partition deed was independent of the receipt of share income. The argument is that Rupchand could have paid interest out of any other amount and, therefore, there was no question of any overriding title in respect of any part of the share income. The contention at first blush appears to be convincing, but if the real nature of the transactions between the parties is considered, it is obvious that what is received by the assessee in the form of share income consists of two elements. The evidence referred to by the AAC and the Tribunal shows that in the books of the partnership firm, the interest which was payable to the individual members of the erstwhile joint family was credited by the partnership firm to the respective accounts of these members and at the same time the total amount of interest so credited to the account of the members of the erstwhile HUF was debited to the capital account of Rupchand in the partnership firm. The result of these transactions in effect was that while the partnership firm seemed to have accepted the liability to pay interest as between the members of the erstwhile HUF and Rupchand, as between the partnership firm and Rupchand, the liability to pay this amount was treated to be that of Rupchand personally and that is how his capital account was debited to the extent of interest credited to the accounts of the members of the erstwhile HUF. The further result of these transactions would be that though for all intents and purposes, what is received from the partnership firm by the assessee is share income, a part of that share income would be in the form of interest which would be payable by the assessee to the other members of the erstwhile HUF. That is the only way how the debit of the amount of interest to the capital account of Rupchand can be explained. Therefore, though apparently, the assessee received share income, since that consisted of interest which was payable by him to the other members of the erstwhile HUF that amount of interest must be taken to be received by him for and on behalf of the other members of the erstwhile HUF.
6. The amount equal to the amount of interest thus never belonged to the assessee and if that is the real nature of the receipt, it will be no argument to say that the share income as it is received must be wholly treated as share income for the purposes of assessment. This appears to be the view which was taken by the Tribunal, when it observed that the assessee received interest for and on behalf of the other members of the erstwhile HUF. On that finding, which does not appear to us to be, in any way, erroneous in law, the only inference that can follow is that there was an overriding title in respect of the amount which was received by the assessee not on his own behalf but for and on behalf of the separated members of the erstwhile HUF as their separate income by way of interest on the amounts lying with the partnership firm. If this is the correct view of the nature of the liability, which is brought about by cl. 3 of the agreement of partition, then the view taken by the Tribunal appears to us to be correct in law. Consequently, the question referred to us is answered in the affirmative and against the revenue. The revenue to pay the costs of this reference.