Back
1998 Supreme(Mad) 563
High Court of Judicature at Madras
THE HONOURABLE MRS. JUSTICE A. SUBBULAKSHMY & THE HONOURABLE MR. JUSTICE JANARTHANAM
R. M. Appavu Chettiar Sons - Appellant
Versus
Commissioner of Income Tax - Respondents
Tax Case No. 1683 of 1986 Reference No. 1153 of 1986 and Writ Petition No. 1656 of 1988
Decided On : 02 April 1998
Interest paid to a partner, who is a partner representing his Hindu undivided family, 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, 1961.
Headnote:
INCOME TAX - Section 40(b) - Interest paid to partners in their individual capacity on deposits made by them in the firm - Whether allowable deduction - Held, yes.
Fact of the Case:
The assessee, a registered firm, made interest payments to its partners in their individual capacity on deposits made by them in the firm. The Assessing Officer disallowed the interest payments under section 40(b) of the Income-tax Act, 1961. The Commissioner (Appeals) and the Tribunal upheld the disallowance. The assessee filed a reference application to the High Court.
Finding of the Court:
The High Court held that the interest payments were allowable deductions under section 40(b) of the Act. The court relied on the Supreme Court decision in Brij Mohan Das Laxman Das v. CIT, which held that interest paid to a partner, who is a partner representing his Hindu undivided family, on the deposit of his personal/individual funds, does not fall within the mischief of clause (b) of section 40.
Issues: Whether the interest payments made to the partners in their individual capacity on deposits made by them in the firm were allowable deductions under section 40(b) of the Income-tax Act, 1961.
Ratio Decidendi: The court held that the interest payments were allowable deductions under section 40(b) of the Act, relying on the Supreme Court decision in Brij Mohan Das Laxman Das v. CIT. The court held that Explanation 2 to section 40(b) recognizes the theory of different capacities an individual may hold, and that an individual, who is a partner representing a Hindu undivided family, can deposit his personal funds with the partnership and receive interest thereon.
Final Decision: The High Court answered the question referred to it in the affirmative, in favor of the assessee and against the revenue. The court also dismissed the writ petition filed by the assessee, challenging the disallowance of interest payments made to the partners in their capacity as kartas representing their respective HUFs.
Janarthanam, J.
The parties in these actions are different. The question of law, however, involved in these actions is one and the same. Desirable it is, therefore, to dispose them of, by a common order, though, of course, after stating the minimal facts required for arriving at a just decision.
2. In the tax case (reference), the assessee Appavu Chettiar Sons, Madurai, is a registered firm, which derives income from jewellery business. The firm consists of eight partners, in their capacity as the kartas of an HUF.
3. The partners, in the capacity of kartas of an HUF, it is said, deposited certain amounts in the firm. Interest payments were made to them in respect of the deposits they have made in the firm. During t e assessment year 1982-83, the question that arose for consideration was as to whether the interest payments made to them can qualify for deduction in computation of the income under section 40(b) of the Income-tax Act, 1961 ('the Act').
4. The Assessing Officer disallowed the total interest payments aggregating to Rs. 14, 528 under section 40(b).
5. The assessee appealed to the Commissioner (Appeals)-IV, Madras, who dismissed the appeal, confirming the view taken by the Assessing Officer.
6. The assessee appealed to the Tribunal.
7. The Tribunal also dismissed the appeal, confirming the view expressed by the Assessing Officer and laterly approved by the Commissioner.
8. On these facts, the Tribunal, at the instance of the assessee under section 256(1) referred for the opinion of this Court, the question as below,
"Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in law in upholding the disallowance of interest admittedly paid to the partners in respect of the funds deposited by them in their individual capacity with the firm of R. M. Appavu Chettiar Sons, Madurai, while they were partners in the said firm representing their respective HUFs under section 40 of the Act for the assessment year 1982-83 ?'.
9. We may now advert to the factual matrix of the writ petition.
(i) Thangam Industries - Petitioner, having their place of business at door No. 112/5, Madurai Road, Virudhunagar, is a registered partnership firm, consisting of five partners, who are the kartas representing their respective - HUFs.
(ii) The Fourth ITO, Virudliunagar, in framing the assessment for the year 1984-85 under section 143(3) of the Act disallowed the interest claimed to the tune of Rs. 2, 35, 185 paid to five partners. The interest payments are relatable to the deposits made by the five partners, in their capacity as the kartas representing their respective HUFs.
(iii) The order so passed was challenged by way of revision under section 264 of the Act, before the Commissioner, Madurai, who, in turn, dismissed the revision, by order dated 25-9-1987 and confirmed the assessment order made by the Assessing Officer.
(iv) The assessee-petitioner challenged the order of the Commissioner in writ proceedings before this Court.
10. The said writ petition was pending before a learned Single Judge of this Court. It appears a representation had been made to the said learned Single Judge that the question', of law involved for consideration therein is identical to the one arising for consideration in the Tax Case (Reference) No. 1683 of 1986 and, consequently, the said learned Judge, by his order, directed the writ petition to be posted before the Bench, before which the said Tax Case (Reference) No. 1683 of 1986 is posted for hearing.
11. The Registry, in turn, placed the order of the learned Single Judge, before the Hon'ble Chief Justice, who, in turn, passed an order directing the Registry to place this writ petition".
@before the Bench, before which Tax Case (Reference) No. 1683 of 1986 had been posted and that is how the writ petition is before us.
12. In the tax case (reference), eight partners are kartas representing their individual HUFs. The deposits were made in the firm by them not in their capacity repre
