A.D.V. Reddy, J.
1. The assessee is 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 Mohanrao. In the books of the firm, for the assessment year 1965-66, interest paid on the capital investment on behalf of 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 Income-tax Officer, holding that in the previous years the interest was being added to the income of the firm as interest paid to a partner, and as there was no change in the position for the two assessment years, added back the interest payments to the income returned as interest paid to the partner. On appeal, the Appellate Assistant Commissioner held that for the years in question the capital account in the books of the firm has been re-designated as the family account and another account was opened in the name of the partner, K. Venkataratnam, to which his share in the profits has been credited at the end of the year and transferred from there to the account of the family, that the interest paid on the funds standing to the credit of the family could not, therefore, be treated as interest paid to the partners so as to bring it within the scope of Clause (b) of Section 40 of the Income-tax Act of 1961 and added back to the income,and, in that view, he directed that the interest paid in these two years should be deleted in computing the assessee's profits. On appeal, the Appellate Tribunal agreed with the order of the Assistant Commissioner and dismissed the appeal. Hence, the reference at the instance of the department for the decision on the following question :
'Whether, on the facts and in the circumstances of the 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 a partner of the firm, within the meaning of Section 40 of the Income-tax Act, 1961, and consequently not deductible in computing the profits and gains of the firm's business ?'
2. It is not disputed that K. Venkataratnam was one of the partners of the firm and he was representing his joint family, made up of himself and his brother, Mohanrao. The joint family as such could not be the partner of the firm, because, from the very nature of its fluctuating composition, consisting of members, some of whom may not have attained the age of majority and some may at a given time be unborn, the joint family as a unit is incapable of entering into a partnership agreement contemplating the creation of mutual rights of agency among its members. Therefore, it is only one of the members of the joint family, either the karta or any one of them, who can by agreement become a partner of the firm and by the partnership agreement, no other members of the family acquires a right or interest in the partnership. The other members of the family may make a claim against the karta or other coparcener who has become a partner for treating the income or profits received from the partnership as a joint family asset, but they cannot claim to exercise the rights of partners nor be liable as partners. In the present case, admittedly, the capital contributed by K. Venkataratnam was as a partner, though the funds may have emanated from the joint family. In the previous assessment years, this was being treated as capital, and interest thereon was not allowed to be deducted from among the profits, as such deduction is prohibited under Section 40(b) of the Income-tax Act and was being added to the income of the firm. There was no change during these two assessment years. Yet, the assessee-firm appears to have opened a joint family account and a personal account in the name of a partner, K. Venkataratnam, transferred the capital to the joint family account and credited the profits alone to the account of the partner, K. Venkataratnam, and then had retransferred even the profits to the credit of the joint family account. This is obviously a ruse to escape the provisions of Section 40(b) of the Act.
3. It is contended by the learned counsel for the assessee that it is by mistake that such, an account was not opened in the earlier years and the joint family cannot be penalised on that account. This contention isuntenable. It is not shown how it was a mistake. The amount transferred to the joint family account was shown as the capital contributed by K. Venkatratnam in the previous years. It is not shown how it suddenly became an investment made by the joint family during the assessment years in question. Admittedly, the joint family has not made any investment in the firm, independent of the capital contributed by K. Venkataratnam as a partner. Therefore, it did not cease to have the characteristics of a capital investment by a partner, the interest on which cannot be allowed to be deducted from the income of the firm under Section 40(b) of the Act. 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. We, therefore, find that the Income-tax Officer was right in adding the interest on these items to the income of the firm, as the deductions claimed are not allowable under Section 40(b) of the Income-tax Act, 1961.
4. In the result, the reference is answered in favour of the department. The assessee will pay costs to the department. Advocate's fee Rs. 250.