Bombay High Court
Commissioner Of Income-Tax, Nasik vs Pannalal Hiralal & Co. on 12 January, 1983
Equivalent citations: (1983)36CTR(BOM)414, [1984]146ITR549(BOM)
JUDGMENT Chandurkar, J.
1. The assessee which is a partnership firm has 6 partners. For the purposes of this reference, we are, however, concerned only with the fact that Ramniranjan Hiralal is a partner in his individual capacity, Narayandas Hiralal is also a partner in his individual capacity and Vasantkumar Hiralal is a partner in his capacity as karta of HUF known as "Basantkumar Hiralal".
2. For the assessment year 1975-76 the firm had paid interest as follows :
Rs.
(i) Shri Ramniranjan Hiralal, HUF 30,078
(ii) Shri Narayandas Hiralal, HUF 5,797
(iii) Shri Vasantkumar Hiralal, Individual 17,567
___________
Total 53,442
3. The assessee-firm claimed a deduction of the amount of interest paid during the assessment year in question. The ITO, however, declined to permit the deduction relying on s. 40(b) of the I.T. Act, 1961. The AAC, however, allowed the assessee's appeal and the appeal filed by the ITO before the Tribunal has been rejected. Arising out of the order of the Income-tax Tribunal, the following question has been referred at the instance of the Revenue under s. 256(1) of the I.T. Act :
"Whether, on the facts and in the circumstances of the case and in law, the Tribunal was right in holding that the provisions of section 40(b) of the Income-tax Act, 1961, are not applicable to the interest payment made to Shri Vasantkumar Hiralal by the assessee-firm wherein Shri Vasantkumar Hiralal Hiralal is a partner qua the partnership ?"
4. From the question referred, it will appear that the Revenue is calling in question only that part of the decision of the Tribunal which relates to payments made to Vasantkumar Hiralal in his individual capacity. The learned counsel for the Revenue has relied before us on. s. 40, clause (b), which expressly provides that :
"In the case of any firm, any payment of interest, salary, bonus, commission or remuneration made by the firm to any partner of the firm."
shall not be deducted in computing the income of the firm. It is difficult for us to see how the Revenue can successfully invoke the provisions of s. 40(b). Admittedly, Vasantkumar Hirala is a partner in his capacity as karta of HUF. The interest received by him is not in his capacity as karta of HUF but in his capacity as an individual. It is now settled law that if an HUF through its manager is a partner of the firm, then for the purposes of the I.T. Act, the income received will be of the HUF; while if any coparcener including the manager has advanced a personal loan, that will be his personal income and interest paid in respect of the personal loan cannot be treated as interest paid to the HUF which is a partner through the manager (See CIT v. Hansa Dyeing and Printing Works.
5. The interest paid to Vasantkumar Hiralal was clearly in his capacity as an individual, and though Vasantkumar Hiralal was a partner in the firm, he was not a partner in his individual capacity but as a representative of the HUF. Thus, interest paid to Vasantkumar Hiralal in his individual capacity would not be paid made to a partner for the purposes of attracting the provisions of s. 40(b) of the I.T. Act, 1961. Accordingly, in our view, the Tribunal was right in holding that the provisions of s. 40(b) were not applicable to the interest paid to Vasantkumar Hiralal in his individual capacity.
6. Therefore, the question referred in answered in answered in the affirmative and against the Revenue. Revenue to pay the costs of this reference.