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T.M.N.M. Somasundara Nadar Sons Vs. Commissioner of Income-tax, Tamil Nadu-iv. - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtChennai High Court
Decided On
Case NumberTax cases Nos. 49 and 50 of 1977
Reported in[1982]137ITR815(Mad)
AppellantT.M.N.M. Somasundara Nadar Sons
RespondentCommissioner of Income-tax, Tamil Nadu-iv.
Excerpt:
- t.n. district police act, 1859 [act no. 24/1859]. section 10 & tamil nadu special police subordinate service rules, rule 14(b), clause (iv) explanation (1); [a.p. shah,c.j., f.m. ibrajhim kalifulla & v. ramasubramanian, jj] rule 14(b),ci.(iv) explanation (1) providing that a person acquitted or discharged on benefit of doubt shall be treated as person involved in criminal case - validity being questioned - held, the impugned rule 14(b) ci.(iv) explanation (1) has been issued in exercise of the power conferred upon the government under the tamil nadu district police act, the criminal city police act and the proviso to article 309 of the constitution., the rule is not assailed on the ground of lack of competence. it is challenged only on the ground that it is violative of articles 14 and..........1961. the officer took the view that although the amount figured in the shestabagam account of the joint family and interest was paid in respect of that amount, the interest on that amount must be regarded as having been paid by the firm to nagarathna nadar as a partner of the firm. the officer took this position because nagarathna nadar happened to be the karta of that family, though he was a partner in the firm in his individual capacity, and the amount in deposit was that of the family. the assessee appealed against this disallowance and the add-back of interest, but without success, both before the aac and before the appellate tribunal. the appellate tribunal took the view that in a matter of disallowance, under s. 40(b) of the i.t. act, of the payment of interest by a firm, the only.....
Judgment:

BALASUBRAHMANYAN J. - In this reference under the I.T. Act, 1961, at the instance of a firm called M/s. T.M.N.M. Somasundara Nadar Sons, Virudhunagar, a dispute touching the disallowance of interest payments made by that firm to a partner of it, by name Nagarathna Nadar, is in question. The firm consisted of 12 partners. Nagarathna Nadar was originally joint along with his brothers in an HUF. On August 16, 1966, there was a partial partition in Nagarathna Nagars family. In that partition, Rs. 50,000 was allotted to Nagarathna Nadars share. This amount which was called shestabagam was credited to a separate account in the books of the assessee-firm in which Nagarathna Nadar was a partner in his individual capacity. The amount carried interest. The interest was also credit in the firms books in the shestabagam account relating to the family. In the profit and loss account of the firm, the account of interest payable to the family under the shestabagam account was deducted as an outgoing. It was claimed as a deduction in the computation of the profits of the firm for the firms income-tax for the assessment years 1971-72 and 1972-73. The ITO, however, disallowed the deduction and added it backs to the assessable profits, invoking s. 40(b) of the I.T. Act, 1961. The officer took the view that although the amount figured in the shestabagam account of the joint family and interest was paid in respect of that amount, the interest on that amount must be regarded as having been paid by the firm to Nagarathna Nadar as a partner of the firm. The officer took this position because Nagarathna Nadar happened to be the karta of that family, though he was a partner in the firm in his individual capacity, and the amount in deposit was that of the family. The assessee appealed against this disallowance and the add-back of interest, but without success, both before the AAC and before the Appellate Tribunal. The Appellate Tribunal took the view that in a matter of disallowance, under s. 40(b) of the I.T. Act, of the payment of interest by a firm, the only question was as to who received the interest. According to the Tribunal, the interest was received by the partner, Nagarathna Nadar, although the interest was payable in respect of an advance made by the joint family. According to the Tribunal, it was no part of the enquiry under s. 40(b) of the Act to probe further and find out who really made the advance and to whom the interest was payable. The Tribunal observed that it was enough that the payment of interest by the firm was received by the partner, Nagarathna Nadar, in whatever capacity he might have received it.

Against this decision of the Tribunal, the present reference has been made by the Tribunal at the instance of the assessee-firm, on the following question of law :

'Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in holding that the interest paid on the sum of Rs. 50,000 for assessment years 1971-72 and 1972-73 has to be disallowed under section 40(b) ?'

A question of this kind arose recently before a Bench of this court, of which one of us was a party in Venkatesh Emporium v. CIT (vide T.C. Nos. 13 to 15 of 1977, judgment dated July 20, 1981) [1982] 137 ITR 593. In that case took, a joint family as such had made advances to a firm and was in receipt of interest on those advances from the firm. The karta of the joint family was a partner in the firm and because of this fact, the ITO disallowed the payment of interest under s. 40(b), treating it as interest paid by the firm to the partner. In that case, the advances made by the family as well as the interest payable thereon figured in a separate folio in the firms accounts opened and maintained for the joint family. Another distinct and separate ledger folio also existed in the firms books relating to the partner as such. On these facts, the Bench of this court came to the conclusion that s. 40(b) could not be applied. The Bench held that the only enquiry under the said provision was to see whether the interest payment was made to a partner and since the interest payment in that case was made only to the joint family, it was not correct to treat it as a payment made to the partner. The Bench also discussed the question whether the joint family, as such, could be regarded as a unit capable of lending moneys to a firm and obtaining interest on these advances. The view expressed by them was that excepting in certain special statutes and in certain special circumstances, the law recognised a joint family as a legal entity, although acting through its karta. It was observed that there was no bar to a joint family being treated as an entity in itself for commercial dealings and other purposes. The Bench accordingly held in that case that there was no legal objection to the joint family being treated as a person who was entitled, and who actually obtained, the payment of interest from the firm.

The above decision, in the manner aforesaid, fully covers the present case as well. The facts which had been noted by the Tribunal in this case were : While Nagarathna Nadar was a partner in the assessee-firm in his individual capacity, there was a partial partition in his joint family and a sum of Rs. 50,000 was allotted to his share, which was brought and credited to a separate account in the books of the partnership firm, and which earned interest. The facts of this case, as found by the Tribunal, are on all fours with the facts which figured in the unreported decision (Venkatesh Emporium v. CIT) (since reported in [1982] 137 ITR 593, which we have cited earlier. We must, therefore, adopt the same conclusion which prevailed in that judgment, in answering the question in the present case as well.

Mr. Jayaraman, the learned departmental counsel, however, sought to discover a distinction on the facts between that case and the present one. He submitted that there is no clear-cut factual finding by the Tribunal in this case to the effect that the 'Shestabagam acount' actually related to an HUF of which the partner, Nagarathna Nadar, was the karta. Accordingly, he submitted that we must proceed on the footing that this account was but an alias for Nagarathna Nadars own individual account in the partnership firm. We do not, however, accept this submission as well founded, having regard to the facts which appear from the record. We have earlier referred to the finding of the Tribunal as to how this sum of Rs. 50,000 came to be deposited in a separate account in the partnership books and to whom this mount belonged. There is a further fact, which could not be disputed by the department, that this interest on the deposit of Rs. 50,000 was actually treated by the department itself as the income of the HUF of Nagarathna Nadar. The said assessment was directed by an order of revision passed by the Commissioner of Income-tax. This being the stand taken by the department as respects the real recipient of the interest, we cannot accept the factual submission put forward by the departments learned counsel that the amount of Rs. 50,000 as well as the interest thereon must be regarded as that of the individual partner concerned and not as that of the joint family.

The learned counsel could not otherwise dispute the similarity of the factual situation in this case and that which prevailed in the case which we have earlier cited. We, accordingly, hold that the Tribunal was not correct in upholding the disallowance made by the ITO of the interest paid on the sum of Rs. 50,000 under s. 40(b) of the I.T. Act for both the assessment years 1971-72 and 1972-73 in the hands of the assessee-firm. The answer we return on the question of law referred to us must, therefore, be in the negative and against the department. In the circumstances, however, there will be no order as to costs.


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