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Additional Commissioner of Income-tax Vs. K.G. Narayanaiah Chetty and Co. - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtAndhra Pradesh High Court
Decided On
Case NumberCase Referred Nos. 30 and 31 of 1973
Judge
Reported in[1977]106ITR420(AP)
ActsIncome Tax Act, 1961 - Sections 40
AppellantAdditional Commissioner of Income-tax
RespondentK.G. Narayanaiah Chetty and Co.
Appellant AdvocateP. Rama Rao, Adv.
Respondent AdvocateS. Dasaratharama Reddy and ;S.R. Ashok, Advs.
Excerpt:
direct taxation - interest on capital - section 40 of income tax act, 1961 - interest on capital of partnership firm credited to accounts of hindu undivided family (huf) of partners - whether interest on capital deductible while computing profits and gains of firms - held, amount credited to accounts of huf was payment of interest to partners and not deductible. - - those accounts were credited with interest as well as their share of profits......named in the deed, viz., k. n. anandaiah and k. n. krishnamurthy, are kartas of their respective hindu undivided families. they were partners of the firm on behalf of their respective families. in the accounting year of the firm ending on march 31, 1966, there was only one account each in the names of k. n. anandaiah and k. n. krishnamurthy. those accounts were credited with interest as well as their share of profits. in the books of account for the accounting years, the balance in the personal accounts in the names of the said two partners was transferred to the accounts of the respective hindu undivided families styled as 'a/c of h.u.f. of k. n. anandaiah & sons 'and' a/c of h.u.f. of k.n. krishnamurthy & sons.' in the accounts of the relevant assessment years, interest was credited.....
Judgment:

S. Obul Reddy, C.J.

1. These two references relate to two assessment years 1968-69 and 1969-70 respectively. As the question referred in both the cases is identical except for the amounts mentioned therein, it would suffice for the purpose of answering the references, if we read the question referred in R.C. No. 30 1973 and it reads :

'Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the interest of Rs. 10,774 and Rs. 9,521 credited to the accounts of (1) K. K. Anandaiah and Sons family and K. N. Krishnamurthy & Sons family, respectively, cannot be disallowed under Section 40(b) of the Income-tax Act, 1961 ?'

2. The assessee is a registered firm consisting of three partners and it carried on wholesale business in cloth. Among the three partners, the first two named in the deed, viz., K. N. Anandaiah and K. N. Krishnamurthy, are kartas of their respective Hindu undivided families. They were partners of the firm on behalf of their respective families. In the accounting year of the firm ending on March 31, 1966, there was only one account each in the names of K. N. Anandaiah and K. N. Krishnamurthy. Those accounts were credited with interest as well as their share of profits. In the books of account for the accounting years, the balance in the personal accounts in the names of the said two partners was transferred to the accounts of the respective Hindu undivided families styled as 'A/c of H.U.F. of K. N. Anandaiah & Sons 'and' A/c of H.U.F. of K.N. Krishnamurthy & Sons.' In the accounts of the relevant assessment years, interest was credited to the accounts of the respective Hindu undivided families and the share of profits was first credited to the individual accounts and later transferred to the accounts of the respective Hindu undivided familes. The Income-tax Officer added the interest so creditedto the accounts of the respective Hindu undivided families under Section 40(b) of the Income-tax Act, 1961. On appeal, the Appellate Assistant Commissioner disagreed with the view of the Income-tax Officer and held that as the Hindu undivided families were not partners as such in the assessee firm, Section 40(b) had no application. On further appeal by the department to the Tribunal, the Tribunal upheld the order of the Appellate Assistant Commissioner. The Commissioner then moved for making a reference under Section 256(1) of the Act and it has been accordingly referred by the Tribunal to this court.

3. Mr. P. Rama Rao, learned counsel appearing for the revenue, invited our attention to a decision of this court in Commissioner of Income-tax v. T. Veeraiah and K. Narasimhulu : [1977]106ITR283(AP) , to contend that the amounts paid by the firm as interest on the amount due to a Hindu joint family which is represented by its karta in the firm is a payment of interest to the partner of the firm within the meaning of Section 40(b) of the Act, and hence not deductible in computing the profits and gains of the firm's business. Mr. Dasaratharama Reddy, the learned counsel appearing for the assessee, contended that that decision is distinguishable on facts, and that the amounts paid by way of interest is not to the individual partners but to the Hindu joint families of which they were members.

4. What amounts are not deductible are stated in Section 40. Section 40(b) says:

'Notwithstanding anything to the contrary in Sections 30 - 39, the following amounts shall not be deducted in computing the income chargeable under the head 'profits and gains of business or profession',--... (b) in the case of any firm, any payment of interest, salary, bonus, commission or remuneration made by the firm to any partner of the firm.'

5. Mr. Dasaratharama Reddy contends that the interest paid by the firm in these cases is not to the partners of the firm but to the respective Hindu undivided families, and, therefore, Section 40(b) is not attracted. Whether the interest was paid by the firm to the partner of a firm or to the joint family which stood as a creditor depends upon the terms of the contract and the entries made in the books of account. In the statement of case submitted by the Tribunal it is stated thus ;

'However, in the books of accounts for the accounting year ending on 31-3-1967, the balance in the personal accounts in the names of K.N. Anandaiah and K. N. Krishnamurthy were transferred to the accounts of their respective HUFs styled as 'Account of HUF of K. N. Anandaiah & Sons' and ' Account of HUF of K. N. Krishnamurthy & Sons'. Thus, the opening balance in the two HUFs accounts as on 1-4-1967 were Rs. 1,41,343 and Rs. 1,40,054, respectively. In the accounts for the accounting year 1967-68,relevant to the assessment year under consideration, the interest is credited to the accounts of the respective HUFs, but the share of profit is first credited to the individual accounts of K. N. Anandaiah and K. N. Krishnamurthy. From the individual accounts of these two partners the shares of profit are further transferred to the accounts of their respective joint Hindu families.'

6. It would, therefore, appear that what was first credited to the accounts in the names of K. N. Anandaiah and K. N. Krishnamurthy were later transferred to the accounts of their respective Hindu undivided families. There is also the further fact that not only the interest credited to their individual accounts was transferred to the accounts of the respective Hindu undivided families, but also the profits of the firm first credited to their individual accounts were also transferred to the accounts of the respective Hindu undivided familes.

7. The facts of the case in Commissioner of Income-tax v. T. Veeraiah and K. Narasimhulu : [1977]106ITR283(AP) were almost identical with the facts of the present cases. The facts as set out by Chinnappa Reddy and A. D. V. Reddy JJ. in that case are these: The assessee was a registered partnership firm with four partners carrying on business in cloth. One of the partners, K. Venkataratnam, represented the interest of a Hindu undivided family made up of himself and his brother, one Mohan Rao. In the books of the firm, for the assessment year 1965-66, interest paid on the capital investment on behalf of K. Venkataratnam, i.e., a sum of Rs. 8,078, and for the assessment year 1966-67, a sum of Rs. 8,502 were credited to the joint family account and deducted from the income of the firm for each of the years. The question referred to this court in that case read:

'Whether, on the facts and in the circumstances of case, the amounts of Rs. 8,078 and Rs. 8,502 paid by the firm as interest on the capital invested by the Hindu undivided family which was represented by its karta in it, was a payment of interest to the partner of the firm, within the meaning of Section 40(b) of the Income-tax Act, 1961, and consequently not deductible in computing the profits and gains of the firm's business ?' In that case too, two accounts were opened--one in the name of the joint family of Venkataratnam and another in the name of Venkataratnam as a partner. Interest credited initially to the account of Venkataratnam as a partner was later transferred to the account of the Hindu undivided family of Venkataratnam. In these cases too, the same device has been adopted by the assessee. The interest was first credited to the personal accounts of the assessees and later transferred to the accounts of the Hindu undivided families. The learned judges in that case held that:

'By the mere trick of opening two accounts, one in the name of the joint family of K. Venkataratnam and another in the name of K. Venkataratnam as a partner, and transferring the capital investment to the joint family account, it cannot be contended that what was once capital has become now the investment made by the joint family.' If really the Hindu undivided families were creditors to the firm there was no reason why there should be two accounts and the interest paid to the partners should be transferred to the accounts of the respective Hindu undivided families. We, therefore, hold that Section 40(b) is attracted and interest paid by the firm to the accounts of the Hindu undivided families is not deductible under that provision.

In the result, the questions referred to us in both the cases are answered in the affirmative, in favour of the revenue and against the assessees. No costs. Advocate's fee Rs. 250 (rupees two hundred and fifty only) in each.


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