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Ram Lal and Sons Vs. Commissioner of Income-tax - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtAllahabad High Court
Decided On
Case NumberIncome-tax Reference No. 1120 of 1977
Judge
Reported in(1980)15CTR(All)74; [1980]124ITR157(All); [1980]3TAXMAN371(All)
ActsIncome Tax Act, 1961 - Sections 40
AppellantRam Lal and Sons
RespondentCommissioner of Income-tax
Appellant AdvocateK.B. Bhatnagar, Adv.
Respondent AdvocateR.K. Gulati and ;A. Gupta, Advs.
Excerpt:
- - the appeals filed by the firm in respect of this addition failed both before the aac and the tribunal. 3. it is settled that only coparceners can blend their individual property with that of the huf, and a female member, of the huf does not enjoy such a right. prakash kaur was a partner of the firm, and as the interest paid would eventually go to her the amount had to be disallowed under section 40(b). the case of london machineyy company [1979] 117 itr ml is clearly distinguishable......of the case, the tribunal was correct in holding that the sum of rs. 35,000 gifted by smt. prakash kaur to the huf is not a valid gift in the eye of hindu law and as such the interest of rs. 5,250 paid in regard to the said amount by the assessee-firm to the huf was not allowable?'2. the reference is concerned with the assessment year 1974-75. the assessee is a registered firm earning income from the distributorship of bata shoe company. in the previous year it had taken a loan from the huf, ram lal & sons, and paid interest amounting to rs. 14,596. initially, the huf had a capital of rs. 1,50,734 as on 31st march, 1965. this was distributed amongst the coparceners and smt. prakash kaur by metes and bounds with the result that the huf had no amount to its credit as on march 31,.....
Judgment:

C.S.P. Singh, J.

1. The Income-tax Appellate Tribunal, Delhi Bench, has referred the following question for our opinion :

'Whether, on the facts and in the circumstances of the case, the Tribunal was correct in holding that the sum of Rs. 35,000 gifted by Smt. Prakash Kaur to the HUF is not a valid gift in the eye of Hindu law and as such the interest of Rs. 5,250 paid in regard to the said amount by the assessee-firm to the HUF was not allowable?'

2. The reference is concerned with the assessment year 1974-75. The assessee is a registered firm earning income from the distributorship of Bata Shoe Company. In the previous year it had taken a loan from the HUF, Ram Lal & Sons, and paid interest amounting to Rs. 14,596. Initially, the HUF had a capital of Rs. 1,50,734 as on 31st March, 1965. This was distributed amongst the coparceners and Smt. Prakash Kaur by metes and bounds with the result that the HUF had no amount to its credit as on March 31, 1966. Thereafter, the capital of the HUF was built up by frequent blending of individual properties by coparceners. Smt. Prakash Kaur, one of the members of the HUF, had, up to the previous year in question, deposited an amount of Rs. 35,000 in the HUF, Sri Ram Lal,Rs. 5,000 and Sri Suresh Kumar, Rs. 5,000. The case of Smt. Prakash Kaur, who was one of the partners of the assessee-firm, was that the amount of Rs. 35,000 was gifted by her to the HUF. The amount of interest payable on Rs. 35,000 amounted to Rs. 5,250. The ITO added back this amount on the ground that Smt. Prakash Kaur being a female, could not blend her individual property with that of the HUF, and further that she could not make a valid gift of this amount to the family. The appeals filed by the firm in respect of this addition failed both before the AAC and the Tribunal.

3. It is settled that only coparceners can blend their individual property with that of the HUF, and a female member, of the HUF does not enjoy such a right. The question as to whether a female can make a gift of her individual property to the HUF has now been answered in the affirmative by the Supreme Court in the case of Pushpa Devi v. C1T : [1977]109ITR730(SC) . Thus, on a gift of Rs. 35,000 being made to the HUF the money became that of the HUF. The loan in question on the findings recorded by the authorities below had been taken by the firm from the HUF. Thus, it was the HUF which was the creditor of the firm and not Smt. Prakash Kaur, who was a partner. Section 40(b) of the I.T. Act, 1961, prohibits paymentof interest to a partner of the firm. Such payments have to be added back to the income of the firm. But inasmuch as the creditor of the firm was the HUF and not Smt. Prakash Kaur, the interest that was paid on this amount of Rs, 35,000 was paid to the HUF and not to Smt. Prakash Kaur. It is not disputed that the HUF was not a partner of the firm. This being so, the payment was not hit by Section 40(b). Sri Ashpk Gupta, appearing on behalf of the department, however, drew our attention to the case of CIT v. London Machinery Company : [1979]117ITR111(All) , and urged that inasmuch as Smt. Prakash Kaur was a partner of the firm, and as the interest paid would eventually go to her the amount had to be disallowed under Section 40(b). The case of London Machineyy Company [1979] 117 ITR Ml is clearly distinguishable. In that case the three persons who were partners of the firm were acting as kartas of their respective HUF. These three partners had deposited their individual funds in the accounts of the firm, and interest was paid on this amount. The question arose as to whether the interest paid could be allowed. It was held that inasmuch as the kartas were partners of the firm, the fact that they had deposited their individual funds in the accounts of the firm would not mitigate against the applicability of Section 40(b), because for the purposes of the firm their capacity as kartas of HUF was immaterial, and as interest was paid to them on deposits made by them the amount paid would come within the mischief of Section 40(b). It will be noticed that in the London Machinery Company's case : [1979]117ITR111(All) , the creditors were the partners of the firm, while in the present case the creditor is the HUF and not Smt. Prakash Kaur, one of the partners. This distinguishes the present case from the London Machinery Company's case : [1979]117ITR111(All) .

4. Sri Ashok Gupta urged that a supplementary statement of the case be called for in order to see as to whether the loan in the books of the firm was in the name of Smt. Prakash Kaur or the HUF. It was contended that in case the loan was in the name of Smt. Prakash Kaur the interest was rightly disallowed under Section 40(b). We do not think that it is advisable at this stage to call for a statement of the case on this aspect of the matter, because from a perusal of the orders passed by the authorities below no such case appears to have been taken up at any stage by the department.

5. We, therefore, answer the question in the negative, in favour of the assessee and against the department. The assessee is entitled to its costs, which are assessed at Rs. 200. Counsel's fee is also assessed at the same figure.


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