Interest paid to a partner in a firm as Karta representing his Hindu Undivided Family is deductible under the Income-tax Act, 1961, while commission paid to a partner in a firm as Karta representing his H.U.F. is not deductible.

JUDGMENT - RANJANA DESAI, J.:---By this reference under section 256(1) of the Income-tax Act, 1961, the Income-tax Appellate Tribunal has referred the following question of law to this Court for opinion at the instance of the revenue :

"Whether on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the interest and commission paid to Shri Deepak N. Shah as partner of the firm representing his H.U.F., is not payment made to partner of the firm and consequently cannot be disallowed under section 40(b) of the Income-tax Act, 1961?"

2.The facts, which are material for the purpose of this reference are as under :

In the assessee firm, there are two partners namely, H.U.Fs. of Narottamdas K. Shah and Smt. Jayalaxmi N. Shah and the H.U.Fs. of Deepak N. Shah. During the previous year relevant to the assessment year 1979-80, the assessee paid commission of Rs. 14,948/- and interest of Rs. 55,740/- to Shri Deepak N. Shah in his individual capacity. The said amount was credited in the individual account of Shri Deepak Shah. The assessee claimed before the Income-tax Officer that provisions of section 40(b) of the Income-tax Act, 1961 ("Act") are not applicable and, therefore, the claim regarding payment of interest and commission should be allowed.

3.The Income-tax Officer did not accept the claim of the assessee. He observed that the interest or commission paid to a partner, in any capacity is to be disallowed under section 40(b) to the Act. The prohibition contained in this clause is absolute and make no distinction between payment made to a partner as a partner and payment made to him in a different character i.e. in his personal capacity as a Karta of the Joint Hindu Family. In this view of the matter, the commission of Rs. 14,948/- and interest of Rs. 55,740/- paid to the partner in his individual capacity were disallowed and added in the income of the assessee.

4.In appeal, the Commissioner of Income-tax (Appeals) confirmed the disallowance made by the Income-tax Officer under section 40(b) of the Act. He observed that the matter was clearly covered by the decisions of several High Courts in which it has been explained that, when the Karta of Hindu Undivided Family enters into a partnership with others, the Karta in his individual capacity alone, is the partner and it has been held that any payment made to him by way of interest, commission etc. is clearly governed by section 40(b) of the Act. Reliance was placed on the decisions of the Madhya Pradesh High Court in (Jalam Chand Mangilal (No. 1) v. C.I.T.)1, 1982(138) I.T.R. 343.

5.In further appeal carried to the Income-tax Appellate Tribunal ("Tribunal"), the Tribunal was of the view that the issue had to be decided in favour of the assessee and against the revenue in view of the decision of this High Court in (C.I.T. v. Pannalal Hiralal Co.)2, 1984(146) I.T.R. 549. It is observed by the Tribunal that two partners of the assessee firm are the two H.U.Fs. and there is no dispute that the commission of Rs. 14,948/- had been paid to Shri Deepak Shah in his individual capacity and that the interest of Rs. 55,740/- had been paid on the individual account of Shri Deepak Shah. The Tribunal, therefore, deleted the addition of Rs. 70,688/- made by the Income-tax Officer. Hence this reference.

6.We have heard the learned Counsel appearing for both sides. So far as the question whether the Tribunal was right in law in holding that the interest paid to Shri Deepak Shah as partner of the firm representing his H.U.F. is not payment made to the partner of the firm and consequently cannot be disallowed under section 40(b) of the Act is concerned, the said controversy is now covered by the decision of the Supreme Court in (Suwalal Anandilal Jain v. C.I.T.)3, 1997(4) S.C.C. 89 wherein the Supreme Court has held that where a person is a partner in a firm as Karta representing his Hindu Undivided Family, interest paid to him by the firm on deposits made by him w

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