1. The assessee is a registered firm. One Seeniappa Nadar was partner in the said firm till his death on November 17, 1972. He had earmarked certain amounts in his capital account in the partnership books to his grandsons by a will executed by him on September 21, 1970. In the will he has stated that the said amount should taken by his son, Kalidasan, as the trustee, that he should take charge of the sum, improve it and hold it on behalf of his sons who were living or who may be born thereafter and that he should divide the amounts among his sons after the last son attained the age of eighteen. After the death of Seeniappa Nadar, the amounts standing to the credit of the deceased were transferred to the account of the estate of the deceased. For the amounts standing to the credit of the estate of the deceased, interest has been credited to the estate of the deceased. Kalidasan, the trustee appointed under the will of Seeniappa, was not a partner in the firm, but his two minor sons, Karunakaran and Kartikeyan, have been admitted to the benefits of the partnership firm. On these facts, the ITO held that the interest of Rs. 12,838 credited to the account of the estate of the late Seeniappa was factually interest payable to the above-said two partners, namely, Karunakaran and Kartikeyan, and, therefore, the said amount cannot be allowed as a deduction in view of s. 40(b) of the Income-tax Act.
2. The assessee went on appeal to the AAC contending that the payment of interest is not to the minors, but to the estate of the deceased Seeniappa Nadar which is in the hands of the trustee and that, therefore, it should not be taken to be payment of interest to the minors who have been admitted to the benefits of the partnership. The AAC held that as the payment of interest was made to Kalidasan in his capacity as the trustee and the minors were not entitled to the interest in the year of account, the said amount of Rs. 12,838 is deductible. The Revenue took the matter on appeal to the Tribunal. The Tribunal also held that the payment of interest was not to the minor partners, that, therefore, s. 40(b) will not come into play and as such the assessee is entitled to the deduction of the interest paid to Kalidasan, the trustee. Aggrieved by the decision of the Tribunal, the Revenue sought and obtained a reference on the following question :
'Whether, on the facts and in the circumstances of the case, the payment of interest of Rs. 12,838 to the estate account was hit by section 40(b) of the Income-tax Act, 1961, for the assessment year 1974-75 ?'
3. The sum of Rs. 12,838 has been paid as interest on the amounts that stood to the credit of Seeniappa Nadar at the time of his death to Kalidasan, the trustee appointed under the will. Admittedly, no payment has been made directly to the minor partners who were admitted to the benefits of the partnership. On these admitted facts, the question is whether the sum of Rs. 12,838 can be said to have been paid as interest to the minor partners so as to attract s. 40(b). Section 40(b) of the I.T.Act, 1961, is to the following effect :
'S. 40. Amounts not deductible :- Notwithstanding anything to the contrary in sections 30 to 39, the following amounts shall not be deducted in computing the income chargeable under the head ' Profits and gains of business or profession .......
(b) in the case of any firm, any payment of interest, salary, bonus, commission or remuneration made by the firm to any partner of the firm.'
4. That the amount was paid in this case by way of interest is not in dispute. But the dispute is as to whether the payment of interest has been made to any partner of the firm. Kalidasan, to whom the payment was made, was not admittedly a partner of the firm. It is not also in dispute that Kalidasan did not receive the said amount as the agent of the minor partners or as the guardian of the minors. If he had received the interest either as the agent or as the guardian of the minors, then the payment can be treated as payment to the minor partners. But, in this case, Kalidasan has received the payment only in his capacity as a trustee appointed under the will of Seeniappa Nadar. As a trustee, he has to administer the estate of the deceased Seeniappa Nadar till the last son attained majority. As per the terms of the will, a legal estate is created in favour of the trustee, Kalidasan, and the estate of the deceased Seeniappa Nadar has vested in Kalidasan as a trustee. The said legal estate vesting in the trustee, Kalidasan, cannot be taken to have vested in the minor partners in which case alone the receipt by Kalidasan can be taken to be a receipt on behalf of the minor partners. So long as there is a legal estate, the amount can be taken to have been paid to that estate which has legally vested in Kalidasan. In this view of the matter, the payment to Kalidasan, the trustee appointed under the will who is to administer the trust till the last son attained majority, cannot be taken to be a payment to the minor partners.
5. In this case, the Tribunal has taken the view that though there is a payment of interest, the payment is not to the partners so as to attract s. 40(b). According to the Tribunal, in order to be a payment, there should be first of all an accrual of right to the payment and, on the facts of this case, there is no accrual of interest to the partners as such having regard to the terms of the will. As per the terms of the will, the minor partners will get their share of the estate including the interest credited only after the youngest son attained the age of 18, and until that date, no right has accrued for payment of interest to any of the partners. In support of the said proposition that there was no accrual of right to interest in favour of the minor partners, the Tribunals has relied on the decision of the Supreme Court in CIT v. Manilal Dhanji : 44ITR876(SC) . In that case, the assessee created a trust. The scheme of the trust was that a certain sum was set apart by the assessee and it was provided that the interest on that amount should be accumulated and added to the corpus and a minor daughter of the assessee was to receive the income from the corpus increased by the additional interest when she attained the age of 18. The Department added this amount under s. 16(3)(b) of the 1922 Act to the income of the assessee. The Supreme Court held that such addition was not correct for the reason that, according to the terms of the trust deed, the income from the trust fund has to be accumulated and added to the trust fund and it is only after the minor attained majority, she has to get the income from the enlarged trust fund. Under the terms of the trust deed, she has no right to the interest nor any beneficial interest therein. She did not derive any benefit therefrom during her minority. Though the said decision was rendered while interpreting the scope and ambit of s. 16(3)(b) of the 1922 Act, the principle laid down in that case squarely applies to the facts of this case where the minor partners have been given the right to a share in the income of the estate of Seeniappa Nadar after they attained majority, and till the date of majority, no right accrues to them in the interest paid.
6. This court in a recent decision in Venkatesh Emporium v. CIT  137 ITR 593, has dealt with a case of payment of interest to the family of the partner, since the partner represented his family in the partnership. This court took the view that even though the joint family was represented by a member of the family, so long as the member is shown to be a partner in his individual capacity, the payment of interest made to the family will not attract s. 40(b). Therefore, the disallowance of interest paid by the firm to the family invoking s. 40(b) of the Act was held not justified.
7. As the payment of interest has been made in this case not to the minor partners, but to the estate in the hands of the trustee who is administering the estate, s. 40(b) cannot be invoked. The result is that the assessee will be entitled to the deduction of interest in a sum of Rs. 12,838. The question referred to us is, accordingly, answered in the negative and in favour of the assessee. The assessee will get the costs from the Revenue. Counsel's fee Rs. 500.