TMI Blog1996 (10) TMI 38X X X X Extracts X X X X X X X X Extracts X X X X ..... ers, Krishna Rao and Narayana Rao, had each 35 per cent. share in the profits and the remaining two partners, Pankajam and Sai Leela, each had 15 per cent. share in the profits. Krishna Rao was partner in the firm representing the Hindu undivided family of which he was a karta. A partial partition was effected on March 31, 1979, in consequence of which the interest in the partnership firm was partitioned among the members of the family; Narasimham s/o Krishna Rao and Parimala d/o Krishna Rao were allotted amounts of Rs. 1,02,608 and Rs. 15,000, respectively. During the relevant accounting period, the firm paid interest of Rs. 18,470 and Rs. 2,700 to Narasimham and Parimala, son and daughter of Krishna Rao. Ignoring the alleged partial partition, having regard to the provision under section 171(9) of the Income-tax Act, 1961, the Assessing Officer added an amount of Rs. 21,170 to the income of the assessee-firm under section 40(b) of the Act. On appeal, the Appellate Assistant Commissioner was of the view that inasmuch as the Hindu undivided family was originally represented in the firm by some other coparcener and as Narasimham and Parimala were not partners of the assessee-partner ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e firm to such individual shall not be taken into account for the purposes of this clause, if such interest is received by him on behalf, or for the benefit, of any other person. " The assessment of the Hindu undivided family after partition is dealt with under section 171, Sub-sections (1) and (9) which are relevant read as follows : Section 171 : " (1) A Hindu family hitherto assessed as undivided shall be deemed for the purposes of this Act to continue to be a Hindu undivided family, except where and in so far as a finding of partition has been given under this section in respect of the Hindu undivided family... (9) Notwithstanding anything contained in the foregoing provisions of this section, where a partial partition has taken place after the 31st day of December, 1978, among the members of a Hindu undivided family hitherto assessed as undivided,--- (a) no claim that such partial partition has taken place shall be inquired into under sub-section (2) and no finding shall be recorded under sub-section (3) that such partial partition had taken place and any finding recorded under sub-section (3) to that effect whether before or after the 18th day of June, 1980, being t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... deration, we think the contention does not merit acceptance. It is true that the income was received by the divided members of the Hindu undivided family, who are not partners. But their claim that the receipt by them was in a capacity other than as members of the Hindu undivided family by virtue of the earlier partial partition, cannot be accepted for the purpose of granting the benefit of section 40(b). The Explanation to section 40(b) recognises the receipt of interest by an individual in a representative capacity but what is significant is that only if a member invests his own individual funds unrelated to the funds invested by the Hindu undivided family as a partner in a firm, the firm is entitled to the deduction permissible under section 36 of the Act in respect of the interest on the funds of such individual. When what is disallowed is the payment of interest by the firm to a partner, could it be said that the payment made by the firm to the divided members of the Hindu undivided family is payment to a partner when the divided members themselves are not partners? Sub-section (9) of section 171 lays down, inter alia, that any claim to partial partition after December 31, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . The amount standing with the assessee-firm on behalf of the Hindu undivided family would continue to belong to the Hindu undivided family and if this is so, interest paid thereon would be interest paid to the karta as the karta became a partner of the assessee-firm, and payment of interest to such a partner is to be disallowed under section 40(b) of the Act... " We respectfully agree with the aforesaid view. Sri Ratnakar, learned counsel for one of the assessees, submitted that the fiction created by section 171(9) has to be confined to the assessment of the Hindu undivided family and it was not intended to be extended to any other section because the other provisions in the Income-tax Act also militate against it. He pointed, out that section 194A provides for deduction of tax at source in respect of payment of interest where the aggregate receipts exceed Rs. 2,500 in a year and it would be difficult to ascertain the aggregate amount liable for deduction at source if the actual payment to a particular individual is ignored and it is taken to be received by the Hindu undivided family. The answer to this is in the provisions of section 194A itself which refers only to the cred ..... X X X X Extracts X X X X X X X X Extracts X X X X
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