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Commissioner of Income-tax, Andhra Pradesh Vs. Dasa N. Govindaiah Setty and Co. - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtAndhra Pradesh High Court
Decided On
Case NumberReferred Case No. 275 of 1978
Judge
Reported in[1986]157ITR270(AP)
ActsIncome Tax Act, 1961 - Sections 40 and 256(2)
AppellantCommissioner of Income-tax, Andhra Pradesh
RespondentDasa N. Govindaiah Setty and Co.
Appellant AdvocateM.S.N. Murthy, Adv.
Respondent AdvocateS. Dasaratharama Reddy, Adv.
Excerpt:
.....256 (2) of income tax act, 1961 - partnership consisted of members of erstwhile hindu undivided family - assessee firm with consent of other partners transferred amount standing in account of a to an account styled 'a and sons family' - relying on judicial precedents court opined that it is open to assessee to transfer capital invested by its partners from out of funds of joint families represented by them to accounts of respective joint families - can claim deduction of interest paid thereon to the accounts of respective joint families in absence of any obligation cast upon partners to contribute any capital. - motor vehicles act (59 of 1988)section 149 (2): [v. gopala gowda & jawad rahim, jj] insurers entitlement to defend the action joint appeal by insured and insurer - held,..........assessee was prevailed upon to agree to the addition of interest while computing the income of the joint family property for that assessment year. in the subsequent assessment years 1967-68 and 1968-69, the assessee renewed its claim; but the income-tax officer negatived the same. the appeal before the appellate assistant commissioner proved unsuccessful. the assessee thereupon appealed to the income-tax appellate tribunal. the tribunal, by its order dated february 25, 1972, remitted the appeals to the file of the appellate assistant commissioner for fresh disposal in the light of the directions given therein. the appellate assistant commissioner re-heard the appeals and upheld the order of the income-tax officer once again. for the assessment years 1970-71 and 1971-72, the assessee made.....
Judgment:

Ramanujulu Naidu, J.

1. The following question is referred to this court for its opinion by the Income-tax Appellate Tribunal, Hyderabad, under section 256(2) of the Income-tax Act, 1961 :

'Whether, on the facts and in the circumstances of the case, the interest of Rs. 40,207 and Rs. 32,415 credited to the accounts of D. Ravindranath family, D. Ravindranath Family Loan account, D. Suryaprakash and Sons Family Account, D. Suryaprakash & Sons Family Loan Account for the assessment years 1972-73 and 1973-74, respectively, is not disallowable under section 40(b) of the Income-tax Act, 1961 ?'

2. The assessee is a firm carrying on business in cloth and silk. The partners of the firm are members of the erstwhile Hindu undivided family which carried on the very same business under the name and style of 'M/s. Dasa N. Govindaiah Setty & Sons, Hindupur'. The interest credited to the accounts of the partners was being added back in computing the total income of the assessee under section 40(b) of the Income-tax Act, 1961, on the ground that the interest was paid to the partners. One of the partners was Sri D. Suryaprakash. The interest which was being credited to his account from year to year was also being included while computing the total income of the firm under section 40(b). On October 24, 1965, the amount which was standing in his account was transferred with the consent of other partners to an account styled 'D. Suryaprakash and Sons family'. The first assessment, after the said transfer was effected, was for the assessment year 1966-67. The assessee pleaded that the interest was not paid to D. Suryaprakash as partner of the firm but paid to the family of which D. Suryaprakash was the karta. The claim was not accepted by the Income-tax Officer and it appears that the assessee was prevailed upon to agree to the addition of interest while computing the income of the joint family property for that assessment year. In the subsequent assessment years 1967-68 and 1968-69, the assessee renewed its claim; but the Income-tax Officer negatived the same. The appeal before the Appellate Assistant Commissioner proved unsuccessful. The assessee thereupon appealed to the Income-tax Appellate Tribunal. The Tribunal, by its order dated February 25, 1972, remitted the appeals to the file of the Appellate Assistant Commissioner for fresh disposal in the light of the directions given therein. The Appellate Assistant Commissioner re-heard the appeals and upheld the order of the Income-tax Officer once again. For the assessment years 1970-71 and 1971-72, the assessee made similar transfers of interest standing in the accounts of two more partners, i.e., 'Dasa N. Govindaiah Setty and Dasa Ravindranath', to new accounts called 'Dasa N. Govindaiah Setty and his family account' and 'Dasa Ravindranath and his family account' and claimed deduction of payment of interest credited to the said accounts under section 40(b) of the Act. The Income-tax officer as usual rejected the claim. On appeal, the Appellate Assistant Commissioner confirmed the order of the Income-tax Officer.

3. When the assessee preferred appeals before the Tribunal for all the four assessment years, the Tribunal, by its order dated July 20, 1974, held that though the partners of the firm were representing their respective joint families, in the eye of law, the joint families were not partners, that the interest claimed was for the monies advanced by the families, that there was no stipulation in the deed of partnership that the partners should invest any capital and that the interest transferred to the accounts of the respective joint families could not be disallowed under section 40(b) of the Income-tax Act.

4. For the assessment years 1972-73 and 1973-74, the assessee claimed deduction of interest of Rs. 40,207 and Rs. 32,415 credited to the accounts of D. Ravindranath family, D. Ravindranath family loan account, D. Suryaprakash and Sons family and D. Suryaprakash & Sons family loan account, from its total income. The claim having been negatived by the Income-tax Officer and the Appellate Assistant Commissioner, the assessee preferred an appeal to the Income-tax Appellate Tribunal, Hyderabad. Following its earlier decision, the Tribunal allowed the appeal preferred by the assessee for the assessment years 1972-73 and 1973-74. However, at the instance of the Revenue, the Tribunal referred the question formulated supra for the opinion of this court.

5. As found by the Tribunal, there is no stipulation in the deed of partnership as to investment of capital by any of the partners. Though originally the amounts were credited in the accounts of the partners, the amounts were later credited to the accounts of the respective joint families, obviously realising the implication of section 40(b) of the Act. The fact, however, remains that interest was paid not to the partners but to the respective joint families represented by them. Under section 40(b) of the Act, payment of interest to any partner of the firm is not liable to be deducted. Inasmuch as interest was paid by the firm to the joint families represented by the partners, there being no obligation on them to invest any capital, section 40(b) of the Income-tax Act is no bar and the firm is entitled to deduct the amounts of interest so paid, from its total income.

6. In Addl. CIT v. Vallamkonda Chinna Balaiah Chetty & Co. : [1977]106ITR556(AP) , a firm consisting of four partners with equal shares, was the assessee. Ramachandraiah (R) was one of them representing his Hindu undivided family. In the deed of partnership, there was no stipulation as to investment of capital by the partners. His family advanced some monies to the firm and the same was credited to the firm in the name of R. Up to the assessment year 1967-68, interest was paid to the account of R. Capital account of the firm was also in the name of R. But in 1967-68, the account was changed to R's family account. The firm paid Rs. 4,068 to R towards interest on the capital invested by the family and claimed deduction from the profits. But the Income-tax Officer disallowed the claim under section 40(b) of the Income-tax Act, 1961, on the ground that the interest was really paid to the partner 'R' and the change of account to R's family was only to avoid the application of section 40(b). The Appellate Assistant Commissioner confirmed the order, while the Tribunal upheld the assessee's plea. Rejecting an application for reference filed by the Department under section 256(2) of the Act, it was held by a Division Bench of this court consisting of Sambasiva Rao, the then Acting Chief Justice, and A. V. Krishna Rao J. (headnote) :

'The amount shown in the capital account of the partner initially was not the capital invested by the partner, but was the money advanced by the joint family. The partners were not required to invest any capital as per the partnership deed. The money really belonged to the joint family and it is only on realising the implication of section 40(b) that the firm placed it in the joint family account. The transfer was made only to indicate the real state of affairs and cannot be treated as a trick or ruse to escape the provisions of section 40(b) of the Act.'

7. We are in complete agreement with the ratio laid down by the Division Bench. It is open to the assessee to transfer the capital invested by its partners from out of the funds of the joint families represented by them to the accounts of the respective joint families and claim deduction of interest paid thereon to the accounts of the respective joint families, in the absence of any obligation cast upon the partners of the firm to contribute any capital. We accordingly answer the question in favour of the assessee and against the Revenue. Costs of the assessee, Rs. 250.


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