Satish Chandra, J.
1. M/s. Radhey Shyam Shri Krishna was a registered firm. It consisted of Sheo Kant and his two sons, Radhey Shyam and Shri Krishna, as the three partners. Sheo Kant died on October 11, 1967, leaving as his heirs his two sons and his widow. The firm was reconstituted by execution a fresh partnership deed on November 1, 1967. In this firm, the two sons and the widow became partners. For the assessment year 1969-70, the firm claimed a deduction of Rs. 6,226 on the ground that it paid this amount as interest to each of the two male partners. Likewise, a sum of Rs. 6,648 was claimed in respect of the assessment year 1970-71.
2. It is not disputed that the firm paid the interest in dispute on the investment brought in by the two partners, Radhey and Shri Krishna, and the payment of interest was made by crediting their accounts.
3. The ITO rejected the claim for deduction. He held that after the death of the father, the sons got the share of the capital in their individual capacity and that, therefore, the payment was, in substance, to the partners of the firm which was prohibited.
4. On appeal, the AAC took a different view. He held that, in law, the money inherited by the two sons Radhey Shyam and Shri Krishna, was ancestral property in their hands qua their own sons and that, therefore, the money inherited by the two sons belonged to their HUF in law. The interest paid on the amount which belonged to the HUF was allowable because it could not be said that the interest was paid to the partners because the partners were individuals and not the HUF through their karta. At this stage, it may be stated that initially the amount of capital inherited by the two sons was entered in the books of the firm in their individual capacity. Subsequently it was transferred to the account of their respective HUFs in the books of the firm. The AAC held that this reversal or adjustment entry was done correctly in view of the true legal position. He, therefore, allowed the appeal pro tanto.
5. The ITO went up to the Tribunal. The Tribunal held that the money inherited by the two sons remained their individual property. Their own sons had no interest in it. They, therefore, invested their own moneys as capital in the reconstituted firm. The reversal entry was held to be an after-thought. On this view, which, in substance, amounted to saying that the payment of interest was, in truth, to the partner, the appeal was allowed and the ITO's order was upheld.
6. At the instance of the assessee, the Tribunal has referred the following question of law for our opinion :
'Whether, on the facts and in the circumstances of the case, the capital received by the sons of Shri Sheo Kant Misra on partition after his death constituted their individual property and the subsequent reversing of the entries made in the books on April 4, 1968, was an after-thought and the payment of interest on these capital accounts was not a permissible deduction ?'
We are unable to uphold the view of the Tribunal that the money inherited by the two sons from their father was their self-acquired or individual property. In law, it was ancestral property in their hands qua their sons. The position is made clear by para. 223 of Mulla's Hindu Law. The Tribunal has referred to a footnote, which says:
'Where a number of sons inherit their father's self-acquired property, they hold it as a joint family property. But now see section 19(b) of the Hindu Succession Act, 1956.'
Section 19(b) does not change the basic principle that the nature of ancestral property remains the same to the heir who inherits it from his father provided he has sons. Section 19(b) lays down the mode of succession whether it will be per capita or per stirpes. It says that if two or more heirs succeed together to the property of an intestate, they shall take the property, (a) save as otherwise expressly provided in this Act, per capita and not per stirpes ; and (b) as tenants-in-common and not as joint tenants. The Tribunal laid emphasis on the fact that they had taken the property as tenants-in-common. This only means that the coparcenary nature of the family is abolished. They took as joint tenants because they were treated as members of the Hindu coparcenary. Under the Hindu Succession Act, they have to take their individual interests as ascertained at the moment of inheritance. But this mode of succession does not touch the true nature of the inheritance by the sons. The nature of the property in their hands continues to be ancestral qua their own offsprings. Therefore, in law, the correct position was that the amount inherited by the two sons was ancestral in their hands qua their sons. In other words, the amounts belonged in law to the respective HUFs headed by each of the two sons Radhey Shyam and Shri Krishna. In this view, the making of the reversal entry was quite justified because obviously the two sons wanted the true legal position to be reflected in the books of account.
7. But this does not improve the position of the assessee. It is now indisputable that the capital contributed by the sons was the money inherited from their HUF. The capital standing to the credit of their names in the firm's books was, in fact, money belonging to the HUF of which these two sons were the karta. Paragraph 4 of the partnership deed provided that the capital of partners Nos. 1 and 2 shall be such as may be invested by each of them according to the needs of the business and the capital of the third party, namely, the widow, shall be such as she should be entitled to receive as her share in accordance with the wishes of late Sheo Kant, her husband. It is thus clear that the two sons were bound to bring in capital before they could become partners. In other words, they were recognized as partners because they were to bring capital. So far as the firm was concerned this money represented the capital contribution of the two partners. If the partners were individuals, then the capital account belonged to the individuals. No matter whether in fact or in law the money may have belonged to the HUF, which they might have brought in, the other way of looking at it could be that since the entire contribution of each of these two partners was money belonging to the HUF in law the HUF was the partner of the firm represented by their kartas. Looked at from any point of view, the interest was paid on the capital contribution of the partners of the firm. That being the legal position, making entries in away that the payment of interest may be shown to a person as a creditor would not make any difference, because interest was paid on the capital contributed by a person who was a partner of the firm.
8. In this view, we answer the question referred to us by holding that the payment of interest on these capital accounts was not a permissible deduction, in favour, of the department and against the assessee. In view of the divided success, parties will bear their own costs.