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Additional Commissioner of Income-tax Vs. Vallamkonda Chinna Balaiah Chetty and Co. - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtAndhra Pradesh High Court
Decided On
Case NumberIncome-tax Case No. 269 of 1974
Judge
Reported in[1977]106ITR556(AP)
ActsIncome Tax Act, 1961 - Sections 40 and 256(2)
AppellantAdditional Commissioner of Income-tax
RespondentVallamkonda Chinna Balaiah Chetty and Co.
Appellant AdvocateP. Rama Rao, Adv.
Respondent AdvocateS. Dasaratharama Reddy and ;S.R. Ashok, Advs.
Excerpt:
direct taxation - deduction - sections 40 and 256 (2) of income tax act, 1961 - amount paid as interest on investment by hindu undivided family (huf) claimed as deduction - deduction denied on ground that karta of huf a partner of firm and interest to partner not allowed as deduction - investment by huf in separate capacity then that of partner - interest qualified for deduction. - .....31, 1968. in the books for 1967-68, however, the name was changed to 'sri v. ramachandraiah's family account'. the income-tax officer opined that the mere change in the title of the account would not make the capital account that of the family. this was affirmed by the appellate assistant commissioner. 3. the tribunal, however, pointed out that out of the four partners of the firm with equal shares, ramachandraiah was one of them representing his hindu undivided family. in the partnership deed, there was no stipulation as to investment of capital by any of the partners. ramachandraiah's family advanced some money to the firm and it was credited to the firm in the name of ramachandraiah, who was also the karta of the family. up to the assessment year 1967-68 interest was credited to.....
Judgment:

Sambasiva Rao, Actg. C.J.

1. The following question was sought to be referred to this court in this case:

'Whether, on the facts and in the circumstances of the case, the amount of Rs. 4,068 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 a 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 ?'

2. The question arose in the following manner: When deduction was claimed in regard to the amount of interest paid to the joint family, the Income-tax Officer disallowed that claim. His reasoning was that the capital account in the firm was in the name of the partner, Sri V. Ramachandraiah till March 31, 1968. In the books for 1967-68, however, the name was changed to 'Sri V. Ramachandraiah's family account'. The Income-tax Officer opined that the mere change in the title of the account would not make the capital account that of the family. This was affirmed by the Appellate Assistant Commissioner.

3. The Tribunal, however, pointed out that out of the four partners of the firm with equal shares, Ramachandraiah was one of them representing his Hindu undivided family. In the partnership deed, there was no stipulation as to investment of capital by any of the partners. Ramachandraiah's family advanced some money to the firm and it was credited to the firm in the name of Ramachandraiah, who was also the karta of the family. Up to the assessment year 1967-68 interest was credited to the account of Ramachandraiah. But, afterwards, realising the implications of Section 40(b) of the Income-tax Act, the account was changed to the name of Ramachandraiah's family account. Since a Hindu undivided family cannot be a partner in a firm, the karta became the partner on behalf of the family. But in the eye of law he is a partner as individual and not in his representative capacity as the karta of the family. So Ramachandraiah alone was the partner. But the money was advanced by his family and this could not be treated as his capital contribution, but a loan, because there is no stipulation in the partnership deed that the partners should contribute capital. Though, originally, the amount was credited in the account of Ramachandraiah because of Section 40(b) of the Act, it was later changed to Ramachandraiah's family account. The Tribunal found that the change was only in clarification of the actualposition. Consequently, the amount paid as interest was not to Ramachandraiah as partner but to Ramachandraiah's family, which had advanced the amount. So the payment does not come within the mischief of Section 40(b) of the Act.

4. Relying on two Bench decisions of this court in Commissioner of Income-tax v. T. Veeraiah and K. Narasimhulu : [1977]106ITR283(AP) and R.Cs. Nos. 30 and 31 of 1973 (Additional Commissioner of Income-tax v. K. G. Narayanaiah Chetty & Co. : [1977]106ITR420(AP) ) dated December 11, 1974, Sri Rama Rao, learned counsel for the revenue, argued that it is a mere trick adopted by Ramachandraiah as a partner by opening an account in the name of the family. In effect and essence it was, however, a payment to a partner. Oar attention is invited to a rectification petition filed by the revenue before the Tribunal in this case. Relying on the first of the aforesaid cases, the Tribunal distinguished the facts of the present case from those in Commissioner of Income-tax v. T. Veeraiah and K. Narasimhulu : [1977]106ITR283(AP) by pointing out that in the case on hand the amount shown in the capital accounts of the partners initially was not the capital invested by the partners but was the money advanced by the joint family. In fact, the partners were not required to invest any capital according to the terms of the partnership deed. The money in this case, unlike the cases referred to, really belonged to the joint family and on finding out the implication of Section 40(b) of the Act, it was again placed in the joint family account. The transfer was effected only to indicate the real state of affairs and therefore it cannot be treated either as a trick or a ruse to escape the provisions of Section 40(b) of the Act, On the facts of the case, the Tribunal said that the principle laid down in the decision would not apply.

5. In the light of the facts pointed out and found by the Tribunal, it is seen that the investment has all along been that of the family. The partners of the firm were not required to make any capital investment. So the money that was standing in the name of Ramachandraiah, the karta of the family, really belonged to the joint family. When such is the fact, the question that is now sought to be referred does not arise. This case stands on different facts from the cases in Commissioner of Income-tax v. T. Veeraiah and K. Narasimhulu : [1977]106ITR283(AP) and R. Cs. Nos. 30 and 31 of 1973 (Additional Commissioner of Income-tax v. K.G. Narayanaiah Chetty & Co. : [1977]106ITR420(AP) ) dated December 11, 1974.

6. In view of these facts, we do not see that any question of law arises.

7. In the result, the income-tax case is dismissed, but without costs.


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