Income Tax Appellate Tribunal - Madras
K.V. Somasundaram Chettiar And Sons vs Income-Tax Officer on 16 January, 1990
Equivalent citations: [1990]34ITD386(MAD)
ORDER
George Cheriyan, Senior Vice-President
1. This appeal by the assessee relates to the assessment year 1981-82. The only point involved is regarding the disallowance of interest paid to the partner Sri S. Venkatachalam, who represented the HUF of which he was the karta. Interest was paid on funds belonging to the HUF. According to the ITO, it was hit by the provisions of Section 40(6). The AAC agreed with the ITO.
2. The submission of the assessee in effect was that the disallowance was not warranted. The assessee has not entered personal appearance and has requested that the case may be disposed of on merits, having regard to the ratio of the decision of the Madras High Court in the case of Venkatesh Emporium v. CIT [1982] 137 ITR 593, which explained the earlier decision in the case of Dwarkadas Rameshwar Goenka v. CIT [1981] 127 ITR 397, where it was the HUF which had advanced funds and interest was paid to the HUF and it was held that the question of making disallowance of the interest paid to the HUF as interest paid to the partner, i.e., the karta would not arise. In this regard it may be stated that in another case CIT v. Nagappa Trading Corpn. [1985] 22 Taxman 303 (Mad.) a reference was sought on the following questions
1. Whether, on the facts and in the circumstances of the case, the Tribunal was correct in law in holding that the sum of Rs. 11,407 and Rs. 15,529 being interest paid by the assessees to Shri N.L.R. Lakshmanan, partner, cannot be added back under Section 40(6) of the Act, for the assessment years 1973-74 and 1974-75 ?
2. Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the provisions of Section -147(b) cannot be validly invoked?
The Madras High Court dismissed the reference application observing as under by judgment dt. 12-12-1983 :-
So far as the first question is concerned, it is seen that a similar question has been answered by this Court in favour of the assessee and against the revenue in Venkatesh Emporium v. CIT [1982] 137 ITR 593 (Mad) and also the decision dated 19-2-1983 in tax case No. 1403 of 1977. Notwithstanding the said two decisions when the revenue sought reference on a similar question in Tax Case Petition No. 406 of 1982, this Court rejected that application by an order dated 26-4-1983. Further, it is seen now that the Supreme Court rejected a similar question, in the special leave petition filed against the judgment of the Gujarat High Court holding that the interest paid to a HUF which was a creditor of the assessee-firm was not interest paid to the karta of the HUF, who was a partner in the firm in his capacity as the karta, and was, therefore, not liable to be disallowed under Section 40(b)of the Income-tax Act 1961 ('the Act') as seen from CIT v. Sajjanraj Divanchand [1983] 144, ITR (St.) 15 (SC). Having regard to the above circumstances this Court will not be justified in directing a reference on question No. 1.
Coming to question No. 2, while dealing with the first question, we have dealt with the merits of the assessment and held against the revenue. The second question is merely, academic and, therefore, we are not directing a reference on the second question as well. The petition is, therefore, dismissed." The submission of the learned departmental representation was that in certain cases it was being held by the Tribunal that even where the karta was representing the HUF interest paid to him on his individual funds should not also be allowed and following that reasoning in the present case, the disallowance was in order. Those decisions have been rendered having regard to the effect of the clarificatory amendment introduced by explanations to Section 40(b) by the Taxation Laws (Amendment) Act, 1984 from 1-4-1985, which have been considered to be applicable to earlier years also because they only explained the provision of law as it always stood. These decisions were arrived at having regard to the intention conveyed by certain Circulars of the Board reproduced in 149 ITR St. 127 as also the interpretation placed by several High Courts on the scope of the Explanation (See CIT v. Narbharam Popat Bhai & Sons [1987] 166 ITR 534/34 Taxman 44 (MP) (FB), N.T.R.'s Estates v. CIT[1985] 157 ITR 285/22 Taxman 194 (AP) and Hindustan Steel Forgings v. CIT [1989] 179 ITR 280/46 Taxman 167(Punj. & Har.). Therefore, I do not consider a conflicting view is being taken in the present case. Accordingly I hold that the disallowance of interest paid of Rs. 13,428 to partner Shri Venkatachalam is not warranted.
3. In the result, the appeal is allowed.