IMPORTANT POINT
Any interest paid to a partner, who is a partner representing his H.U.F., on the deposit of his personal/individual funds, does not fall within the mischief of clause (b) of Section 40 of the Income Tax Act.

JUDGMENT

B.P. Jeevan Reddy, J.-Clause (b) of Section 40 of the Income Tax Act specifies one of the amounts which shall not be deducted in computing the income chargeable under the head "Profits and gains of business or profession". As it stood at the relevant time, it read thus:

"40. 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 Profit 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.

Explanation 1: Where interest is paid by a firm to any partner of the firm who has also paid interest to the firm, the amount of interest to be disallowed under this clause shall be limited to the amount by which the payment of interest by the firm to the partner exceeds the payment of interest by the partner to the firm.

Explanation 2 : Where an individual is a partner in a firm on behalf, or for the benefit, of any other person [such partner and the other person being hereinafter referred to as partner in a representative capacity and person so represented respectively],-

(i) interest paid by the firm to such individual or by such individual to the firm otherwise than as partner in a representative capacity, shall not be taken into account for the purposes of this clause;

(ii) interest paid by the firm to such individual or by such individual to the firm as partner in a representative capacity and interest paid by the firm to the person so represented or by the person so represented to the firm, shall be taken into account for the purposes of this clause.

Explanation 3 : Where an individual is a partner in a firm otherwise than as partner in a representative capacity, interest paid by the firm to such individual shall not be taken into account for the purposes of this clause, if such interest is received by him on behalf, or for the benefit, of any other person."

2. The first and the main question arising herein is whether interest paid to a partner on the amounts deposited by him in his individual capacity is hit by clause (b) where the partner is a partner not in his individual capacity but as representing a Hindu Undivided Family (H.U.F.). The question which was referred by the Tribunal for the opinion of the High Court in this behalf read:

"Whether the Tribunal was correct in allowing the assessee s claim for interest paid on the credit balance in the individual account of Sri Rajendra Kumar?"

3. The assessee, Brij Mohan Das Laxman Das, is a registered partnership firm having three partner. One of them is Rajendra Kumar. He was a partner as the Karta of and representing him H.U.F. The partnership firm maintained two accounts in the name of Rajendra Kumar, a capital account and a deposit account. The share of profit of Rajendra Kumar was credited to the capital account while the interest paid to him on the deposits made by him was credited to his deposit account. In other words, the deposits were said to have been made by Rajendra Kumar in his individual capacity and accordingly interest was paid to him in his individual capacity. Rajendra Kumar was assessed in the status of individual and also in the status of H.U.F. For the Assessment Year 1974-75, the Income Tax Officer called upon the assessee herein to show cause why the interest amount in a sum of Rs. 7, 923/- paid to Rajendra Kumar by not added back to the income of the partnership firm since it was a payment made to a partner. The appellant-assessee contended that since the amount was paid to Rajendra Kumar in his individual capacity and not in his capacity as a partner, the said payment cannot be disallowed under clause (b) of Section 40. This plea was rejected by the Income Tax Officer and his view was affirmed in appeal by the Appellate Assistant Commissioner. On further appeal, however, the Tri