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Jalam Chand Mangilal (No. 2) Vs. Commissioner of Income-tax - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtMadhya Pradesh High Court
Decided On
Case NumberM.C.C. No. 148 of 1980
Judge
Reported in(1983)33CTR(MP)29; [1982]138ITR347(MP)
ActsIncome Tax Act, 1961 - Sections 40
AppellantJalam Chand Mangilal (No. 2)
RespondentCommissioner of Income-tax
Appellant AdvocateGoyal, Adv.
Respondent AdvocateR.C. Mukati, Adv.
Excerpt:
.....liable to be convicted under section 324 of i.p.c., sentence of 3 years imprisonment reduced to period undergone by appellant considering mental agony suffered by him - the allahabad high court clearly dissented from the view taken by the andhra pradesh in addl......individual capacities. the karta-partners deposited funds in their individual capacities and the firm paid interest to them as individuals. the ito disallowed this interest. the matter finally reached the tribunal and the tribunal held that since these persons were partners in a different capacity, i.e., as kartas, and interest was paid to them in their capacity as individuals, the same could not be held to be payment to a partner of the firm. at the instance of the revenue, the question was referred to the high court for opinion. after referring to various decisions, the allahabad high court observed (p. 116): 'section 40(b) prohibits any allowance in respect of any payment by way of interest, salary, bonus, commission or remuneration made by the firm to any of its partners. the.....
Judgment:

Shukla, J.

1. Income-tax Appellate Tribunal, Indore, has made this reference under Section 256(1) of the I.T. Act stating the case and seeking our opinion on the following question :

' Whether, on the facts and circumstances of the case and in terms of Section 40(b) of the Act, the Tribunal is correct in holding that the interest payment made to Gokulchand (HUF), Shantilal (IND), Kantilal (IND) and Gajendrakumar (IND) is disallowable, as it is made by the firm to the partner of the firm '

2. Assessee is a partnership firm consisting of the following partners :--

1. Shri Gokulchand (Individual).

2. Shri Shantilal (karta of his HUF).

3. Shri Kantilal (karta of his HUF).

4. Shri Gajendrakumar (karta of his HUF).

5. Shri Mansukhlal.

3. These partners contributed capital to the firm which was credited in their separate accounts. Besides, they advanced loans to the firms purporting to be in their individual capacities and credited separately. In this behalf they were paid interest in accounting years relevant to the assessment years 1975-76 and 1976-77 as follows :

Asstt. Year 1975-76

Rs.

Asstt. Year 1976-77

Rs.

Gokulchand (HUF)

1,497

2,266

Shantilal (IND)

7,349

8,560

Kantilal (IND)

4,719

5,753

Gajendrakumar (IND)

4,880

3,835

18,445

20,414

4. The ITO disallowed the claim for deduction of interest in the assessment of the firm on the ground that interest to partners was not payable in view of Section 40(b) of the I.T. Act.

5. In the first appeal, the Commissioner (Appeals) took the contrary view and, allowing these payments, deleted the additions.

6. The department filed a second appeal before the Appellate Tribunal. The Tribunal held that irrespective of the capacities in which the partnersgot the interest, the same was not allowable as deduction in view of the bar under Section 40(b) of the I.T. Act. At the instance of the assessee the question reproduced above has been referred to us for opinion. Identical question had been referred to us in respect of the same assessee for the assessment year 1974-75 and we have held in Misc. Civil Case No. 102/80 dated February 27, 1982--since reported in : [1982]138ITR343(MP) that the interest paid by the firm to the partners, Shantilal, Kantilal and Gajendra-kumar, was not deductible in view of the embargo under Section 40(b) of the I.T. Act.

7. Learned counsel for the assessee, Shri Goyal, however, urged that the case of the partner, Gokulchand, stood on a different footing and the same was not decided in the earlier case. He, therefore, confined himself to the question of payment of interest to the partner, Gokulchand.

8. As observed earlier, Gokulchand had joined the firm in his individual capacity while interest was paid to him representing his HUF. Learned counsel contended that the interest paid to a partner in his individual capacity may be hit by Section 40(b) of the Act but when a person becomes a partner in an individual capacity and the interest is paid to his HUF, Section 40(b) will not be applicable. For this proposition he relied on CIT v. Sajjanraj Divanchand [1980] 126 ITR 654, Terla Veeraiah v. CIT : [1979]120ITR502(AP) and CIT v. K. Krishnaiah Chetty & Sons : [1981]131ITR410(AP) .

9. There is apparently a conflict of views on this question. The Andhra Pradesh High Court itself in CIT v. T. Veeraiah and K. Narasimhulu : [1977]106ITR283(AP) and Addl. CIT v. K.G. Narayanaiah Chetty & Co. : [1977]106ITR420(AP) , had taken a view that the interest paid by a firm to the accounts of the HUFs of the respective partners was not allowable as a deduction in view of the bar under Section 40(b) of the I.T. Act. The Allahabad High Court in CIT v. London Machinery Co. : [1979]117ITR111(All) has discussed this issue in great detail and it will be useful to examine the facts and the reasoning of the court in the said case.

10. In London Machinery Co.'s case there were seven partners, three of whom acted as kartas of their respective HUFs while the other four entered into the firm in their individual capacities. The karta-partners deposited funds in their individual capacities and the firm paid interest to them as individuals. The ITO disallowed this interest. The matter finally reached the Tribunal and the Tribunal held that since these persons were partners in a different capacity, i.e., as kartas, and interest was paid to them in their capacity as individuals, the same could not be held to be payment to a partner of the firm. At the instance of the Revenue, the question was referred to the High Court for opinion. After referring to various decisions, the Allahabad High Court observed (p. 116):

'Section 40(b) prohibits any allowance in respect of any payment by way of interest, salary, bonus, commission or remuneration made by the firm to any of its partners. The prohibition is in terms absolute, and makes no distinction in respect of payments of interest, commission, salary, bonus or remuneration. It does not make any distinction in respect of the character of or capacity in which the payment is made to the partner.'

11. The conclusion of the court was that interest paid by the firm to the partners, either on the amounts brought by them from the respective HUFs or on amounts brought in their individual capacity, was in either case a case of interest (paid) to the partners and such payments were not allowable in view of Section 40(b) of the Act.

12. We respectfully agree with the reasoning of the Allahabad High Court. The Allahabad High Court clearly dissented from the view taken by the Andhra Pradesh in Addl. CIT v. Vallamkonda Chinna Balaiah Chetty and Co. : [1977]106ITR556(AP) , which has been approved and relied on by the Gujarat High Court in Sajjanraj's case [1980] 126 ITR 654.

13. The Gujarat High Court in Sajjanraj's case seems to distinguish a case where a person enters into a partnership in his capacity as the karta of an HUF and is paid interest in his individual capacity, and a case where a person enters into a partnership agreement in his individual capacity and the interest is paid to him representing his HUF. In the former case, the Gujarat High Court agrees with the Allahabad High Court that the interest is not allowable as a deduction but in the latter case it is so allowable. We are unable to accept this dichotomy. The main fact which has been considered for applying Section 40(b) of the I.T. Act is not as to in what capacity the loan was advanced or interest was paid to a partner but whether the interest was paid to the person who has joined as a partner of the firm. Agreeing with the principle laid down by the Allahabad High Court in London Machinery Company's case : [1979]117ITR111(All) , we hold that irrespective of the capacity in which a person joins a partnership firm and is paid interest by the firm, Section 40(b) is a bar to payment of interest to the partner of the firm. In the present case, the partner, Gokulchand, had joined the firm in his individual capacity and interest was paid to him as karta of his HUF. In fact, the interest was paid to Gokulchand, who is a partner of the assessee-firm and, therefore, whatever may be his capacity, the payment of interest to him will not be allowable in view of Section 40(b) of the I.T. Act.

14. We, therefore, hold that the Tribunal was correct in its view in terms of Section 40(b) of the I.T. Act that the payments of interest made to Gokulchand, Shantilal, Kantilal and Gajendrakumar were not allowable as the same were made by the firm to the partners of the firm. Our answer is in the affirmative and against the assessee.

15. There shall be no order as to costs.


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