Gauhati High Court
Commissioner Of Income-Tax vs Jain Hardware Stores on 18 July, 1990
Equivalent citations: [1990]186ITR272(GAUHATI)
JUDGMENT A. Raghuvir, C.J.
1. This reference is made under the Income-tax Act, 1961, at the instance of the Commissioner of Income-tax, North Eastern Region. The assessee is a partnership firm consisting of four partners, and one among the four is Dindayal Jain. The firm paid to Dindayal Jain Rs. 2,340 in the relevant assessment year 1978-79, Rs. 2,864 in the assessment year 1979-80, Rs. 4,032 in the assessment year 1980-81 and Rs. 4,924 in the assessment year 1981-82. These four amounts were the interest amounts paid on investments. The firm sought deduction of the four amounts as they were paid to the Hindu undivided family of which Dindayal Jain is the karta. These four amounts were not paid to a partner of the firm. The Income-tax Officer rejected the claim. The Commissioner of Income-tax (Appeals) and the Appellate Tribunal allowed the deductions. Thereafter, the following question is referred to be answered by this court for the four assessment years :
"Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that where the assessee-partner is representing his Hindu undivided family in the firm, interest paid by the firm on individual investments made in the firm does not attract the provisions of Section 40(b) of the Income-tax Act, 1961 ?"
2. Conceptually, a Hindu undivided family is not a juristic person and in that sense is not sui juris. (The Latin phrase means of his own right or is not subject to legal disability like infancy, mental disorder or under the power of a guardian and can manage its affairs). In the Income-tax Act of 1961, a Hindu undivided family is defined to be a person and, therefore, is a unit of assessment. The incidents of a Hindu undivided family in numerous cases were spelt out to mean that the Hindu undivided family acts through its karta and cannot enter into an agreement with any individual, but can be a partner in a firm and cannot exercise all rights of a partner under the Partnership Act. A coparcener of a Hindu undivided family can lay claim against the karta to monies received on behalf of the Hindu undivided family. The coparceners of the Hindu undivided family are not considered partners of a firm. These attributes show that a Hindu undivided family is not a juristic person but at the same time is a unit of assessment and that Hindu undivided family can be a partner but the constituent coparceners are not partners and that the karta is accountable to the coparceners may sound esoteric. But all these are real in the fiscal world. These aspects demonstrate the breadth of accession which is provided by the karta to the Hindu undivided family. This elucidation is sufficient now here ; the rest may have to be dealt with in Hindu law in a case relating to Mitakshara.
3. Similar questions as in the instant case are often raised under two provisions of the Act, one is under Clause (b) of Section 40 and the other is a cognate question that arises under Clause (1) of Section 64 of the Act. To obviate the difficulties the Board on August 11, 1976, in Instruction No. 997 recounted the disputes under the former that arise intermittently and recited that amounts paid to individual partners received on behalf of the Hindu undivided family and received in the capacity of a partner have to be distinguished. The Board specified that if amounts are paid to a Hindu undivided family in that case they are to be deducted.
4. In a reference case under the Income-tax Act, on September 22, 1989, in Income-tax Reference No. 5 of 1983 (CIT v. Jhabarmal Agarwalla [1990] 184 ITR 431), this court dealt with the cognate case under Section 64 of the Act. Dr. B. P. Saraf J., speaking for the Bench, posed the following question in para 11 of that decision (at page 436) : "We may now turn to the next question and decide whether, for the purpose of assessment and levy of income-tax, the Act recognises the representative capacity of a partner. In other words, where an individual is a partner in his representative capacity as karta of a Hindu undivided family in whose hands will the income from the firm be assessable--in the hands of the individual who is a partner or the Hindu undivided family whom he represents ?", and answered the question in para 16 thus (at page 438) : "that a literal interpretation of the word 'individual' will render the Act itself unworkable. Such an interpretation is not permissible by the well-accepted principles of interpretation of statutes. We, accordingly, hold that the expression 'individual' used in Section 64 of the Act has to be read in the context of income arising to such individual from the membership of the partnership, etc. If the income does not arise to him, then the Section would not apply. In a case where the karta of a Hindu undivided family is a partner in his representative capacity, admittedly the income does not arise to him. The income arises to the Hindu undivided family and by virtue of the provisions of the Income-tax Act itself, it is assessable in the hands of the Hindu undivided family. The Act recognises the concept of a person being a partner in a firm in his individual capacity as well as as a karta of a Hindu undivided family. It is aware of the provisions of the Indian Partnership Act, 1932. It has clearly provided that where the karta is a partner in a firm and it is found as a matter of fact that he is a partner representing the Hindu undivided family the income arising from such partnership shall belong to the Hindu undivided family and shall be assessed in the hands of the Hindu undivided family. The law being so clear and explicit in regard to the dual status of an individual, we have no manner of doubt in our minds that Section 64(1) cannot apply where an individual is a partner in a firm as a karta of his Hindu undivided family."
5. What is referred to in the above passage as the dual capacity often brings forth questions as in the instant case. The Allahabad High Court in the case, CIT v. London Machinery Co. [1979] 117 ITR 111 recognised the dual capacity yet held that the amounts whether paid to the karta or to the individual, the deductions are not to be permitted. The following passage in the above case speaks to that effect (at page 120) : "In our view, the interest paid by the firm to the partners either on the amounts brought by them from their respective Hindu undivided family funds, or brought from their own individual funds is in either case payment of interest to the partners. Both these kinds of payments are within the purview of Section 40(b), and are inadmissible as deductions in the assessment of the firm." From the above passage, we are impelled to conclude that the Allahabad High Court recognised the dual capacity but held that amounts whether paid to the individual as a partner or to karta of a Hindu undivided family, in both cases Clause (b) of Section 40 is attracted. The circulars were referred to in Shri Ramanjaneya Textiles v. CIT [1986] 159 ITR 509, by the Karnataka High Court but in that case it was held that the principles set out in the circular did not call for application. In CIT v. Sajjanraj Divanchand [1980] 126 ITR 654, the Gujarat High Court accepted the dual capacity and held that monies paid to the Hindu undivided family are to be deducted. The Bombay High Court in CIT v. Pannalal Hiralal and Co. [1984] 146 ITR 549 and the Madhya Pradesh High Court in a Full Bench case in CIT v. Narbharam Popatbhai and Sons [1987] 166 ITR 534, have held to the same effect. In Hindustan Steel Forgings v. CIT [1989] 179 ITR 280, the Punjab and Haryana High Court considered the three Explanations incorporated by the Taxation Laws (Amendment) Act in 1984 which came into force from April 1, 1985 and recorded a similar conclusion as in the case of the Madhya Pradesh High Court.
6. The Gujarat High Court in the case cited earlier considered four Andhra Pradesh cases -- CIT v. Veeraiah (T.) and K. Narasimhulu [1977] 106 ITR 283, Addl. CIT v. K. G. Narayanaiah Chetty and Co. [1977] 106 ITR 420, Addl. CIT v. Vallamkonda Chinna Balaiah Chetty and Co. [1977] 106 ITR 556 and Terla Veeraiah v. CIT [1979] 120 ITR 502. In the first and fourth cases, the Gujarat High Court case explained the facts of the cases and the conclusions reached. In the third Andhra Pradesh case, the Hindu undivided family was held to be the creditor and amounts paid to the Hindu undivided family were deducted. In the second case, it was held that the amount was paid to the partner, therefore, the deduction was not allowed. As to the first and fourth cases, we are in agreement with the comments made by the Gujarat High Court as respects the two cases. The Gujarat High Court reconsidered its decisions in a Full Bench decision Chhotalal and Co. v. CIT [1984] 150 ITR 276 and reached the same conclusion as in the case earlier cited. In the Kerala case, CIT v. Veeriah Reddiar [1969] 73 ITR 162, a proprietor of a business contended that interest paid to the proprietor is not payment to a partner of the firm. The contention, in our view, was correctly rejected.
7. Reverting to the facts of the instant case, the Revenue urged that the Tribunal found that the four amounts were paid to a partner of the firm. This contention is not well-founded. The facts in the case show that the Income-tax Officer without any discussion rejected the claim for deduction. The Commissioner of Income-tax (Appeals) and the Tribunal overturned the Income-tax Officer's decision and allowed the claim. What does that mean ? That means that the contention raised by the Revenue is not well-founded on facts.
8. For the aforesaid reasons, the question is answered in the affirmative, in favour of the assessee and against the Revenue. No costs.