Interest and salary paid to partners in a representative capacity or to a Hindu joint family through a partner are not liable to be disallowed under section 40 (b) of the Income-tax Act, 1961.

Y. V. ANJANEYULU, J.

( 1 ) THE Income-tax Appellate Tribunal has referred the following questions of law for consideration of this court under section 256 (1) of the Income-tax Act, 1961 (for short "the Act") :"1. Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the interest payments of Rs. 66,671 in the assessment year 1973-74 and Rs. 75,810 in the assessment year 1974-75 are attracted by section 40 (b) of the Income-tax Act, 1961, and are not deductible ? 2. Whether, on the facts and in lie circumstances of the case, the Tribunal was right in holding that the salary payments of Rs. 15,000 in the assessment year 1973-74 and Rs. 24,000 in the assessment year 1974-75 are attracted by section 40 (b) of the Income-tax Act, 1961, and are not deductible ?"

( 2 ) THE assessee is a partnership firm consisting of eight partners. During the accounting year relevant to assessment years 1973-74 and 1974-75, the partnership firm paid interest to four out of the eight partners. The partnership firm also paid salary to two out of the eight partners. The amounts paid by way of interest as well as salary were claimed as deduction in the computation of total income of the partnership firm. The Income-tax Officer declined to accept the assessees claim for deduction on the ground that the interest as well as the salary were paid to the partners of the firm and consequently under section 40 (b) of the Act, they are not deductible in computing the total income of the partnership firm. The assessee contended that the partners to whom interest and salary were paid were not partners in their individual capacity but were representing their respective Hindu joint families as "kartas". It is claimed that the share income derived by the respective partners was assessed in the hands of the respective joint families of which the partners were the "kartas". It is further claimed that the partners invested their individual funds in the partnership firm and also derived salary for services rendered by them individually to the partnership firm. It was also claimed that the salary paid to the partners by the assessee was assessed in the individual hands of the partners. The assessee-firm contended that the interest and salary paid to the partners in their individual capacity were not liable to be disallowed under section 40 (b) of the Act in the computation of the total income of the partnership firm.

( 3 ) ON the Income-tax Officer declining to accept the above claim, the assessee preferred an appeal to the Appellate Assistant Commissioner, who confirmed the assessment made by the Income-tax Officer. The assessee thereafter filed a second appeal to the Income-tax Appellate Tribunal, which also confirmed the assessment on the short ground that the disallowance is supported by a judgment of this court in CIT v. Veeraiah [1977] 106 ITR 283 (AP ). The assessee thereupon applied for and secured the present reference under section 256 (1) of the Act.

( 4 ) SRI S. Parvatha Rao, learned counsel for the assessee, submitted that the authorities below were in error in rejecting the assessees claim for the deduction of the interest and salary paid to the partners. It is pointed out that the partners to whom interest and salary were paid were admittedly representing their respective Hindu joint families as "kartas" and the share income derived by them from the assessee-firm was assessed in the hands of their respective joint families. Learned counsel also pointed out that, admittedly, the amounts on which interest was paid belonged to the partners in their individual capacity. No part of the joint family funds were invested in the assessee-firm. On the monies lent by them individually, the partners were entitled to receive interest and the payment of such interest has nothing to do with the share held by the partner in a representative capacity in the assessee-firm. According to the learned counsel, it is pure and simple tra

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