TMI Blog1998 (10) TMI 53X X X X Extracts X X X X X X X X Extracts X X X X ..... 1 ? 2. Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in holding that the sum of Rs. 4,296 and representing interest paid on Hindu undivided family credit balances should be added under the provisions of section 40(b) of the Income-tax Act, 1961, for the assessment year 1980-81?" The facts in brief are as follows : The assessee is a firm dealing in fertilisers, pesticides, insecticides, oil engines, etc., besides doing money-lending business. The assessee paid salary of Rs. 25,000 to the partners and credited interest to the partners' account on salary accumulations. The partners are partners in the firm in their capacity as the kartas of the respective joint families. The salary and the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... econsideration. In N. T. R. Estate v. CIT [1986] 157 ITR 285 (AP), the question that arose for consideration is whether the salary payment of Rs. 15,000 in the assessment year 1973-74 and Rs. 24,000 in the assessment year 1974-75 are attracted by section 40(b) of the Income-tax Act, 1961, and are not deductible ? This court held that: "In order to determine whether the salary paid to a partner should be allowed as a deduction in computing the income of the partnership firm, it is necessary to examine who is the real recipient of the salary paid to the partner. If the recipient is a partner as karta of a Hindu undivided family and the payment of salary has no real and sufficient connection with the share held by the joint family through ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n which the family has to bear a higher burden of tax even though they do not share the actual salary which goes only to the individual. Likewise, the other partners also have to bear the higher burden of tax even though the salaries paid to the individual do not really represent the share of profit. This also follows from the provisions of the Hindu Gains of Learning Act (Act 30 of 1930), under which the gains, of learning must be held to be separate property of the individual and cannot be treated as part of the income of the joint family. Once the joint family is recognised as the real partner of the firm, the law has departed from the original position of recognising only the individual as a partner and, consequently, it must also be re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to clause (b) of section 40. Once this is so, we see no reason to hold that this theory of different capacities is not valid or available for the period anterior to April 1, 1985. Accordingly, we hold that even for the period anterior to April 1, 1985, any 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. In this view of the matter, we agree with the view taken by the Rajasthan High Court in Gajanand Poonam Chand and Bros.' case [1988] 174 ITR 346 that Explanation 2, in the context of clause (b) of section 40, is declaratory in nature." In other words, though a person representing the Hindu un ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in his capacity as a partner representing the Hindu undivided family, but in his individual capacity for services rendered by them. In view of the finding of the Income-tax Officer that the payment is for services rendered in their individual capacity and not as partners, section 40(b) is not applicable to the facts of the present case. We have already referred to the observations of this court in A. Ramakrishnaiah's case [1994] 209 ITR 156. This court held taking into account the Hindu Gains of Learning Act (Act 30 of 1930) under which the gains of learning must be held to be separate property of the individual and cannot be treated as part of the income of the joint family. In the light of the facts of this case and in view of the judg ..... X X X X Extracts X X X X X X X X Extracts X X X X
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