TMI Blog1984 (10) TMI 19X X X X Extracts X X X X X X X X Extracts X X X X ..... nting year relevant to assessment years 1973-74 and 1974-75, the partnership firm paid interest to four out of the eight partners. The partnership firm also paid salary to two out of the eight partners. The amounts paid by way of interest as well as salary were claimed as deduction in the computation of total income of the partnership firm. The Income-tax Officer declined to accept the assessee's claim for deduction on the ground that the interest as well as the salary were paid to the partners of the firm and consequently under section 40(b) of the Act, they are not deductible in computing the total income of the partnership firm. The assessee contended that the partners to whom interest and salary were paid were not partners in their individual capacity but were representing their respective Hindu joint families as " kartas ". It is claimed that the share income derived by the respective partners was assessed in the hands of the respective joint families of which the partners were the " kartas ". It is further claimed that the partners invested their individual funds in the partnership firm and also derived salary for services rendered by them individually to the partnership firm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rship interest held by the partner for and on behalf of the joint family. Learned counsel further urged that the provisions of section 40(b) do not empower the rejection of the assessee's claim for deduction of interest and salary in the facts and circumstances above stated. Learned counsel relied on the decisions of this court in Addl. CIT v. Vallamkonda Chinna Balaiah Chetty Co. [1977] 106 ITR 556 (AP) and Terla Veeraiah v. CIT [1979] 120 ITR 502 (AP), of the Gujarat High Court in CIT v. Sajjanraj Divanchand [1980] 126 ITR 655 and of the Madras High Court in Venkatesh Emporium v. CIT [1982] 137 ITR 593. Learned standing counsel for the Revenue, Sri M. Suryanarayana Murthy, urged that the interest and salary paid to the partners were rightly disallowed under the provisions of section 40(b) of the Act. Learned standing counsel submits that it is immaterial whether the partners to whom the interest and salary were paid were partners in a representative capacity (as the partners were admittedly representing the joint families of which they are the " kartas ") or were partners in their individual capacity. According to the learned standing counsel, the terms of section 40(b) of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y section 10 of the above Amendment Act, three Explanations were inserted. Explanations 2 and 3 deal with the matter under consideration. The effect of these Explanations is: (a) if a person is a partner in a firm in a representative capacity and if such partner lends to the partnership monies belonging to him individually, then the interest paid to such partner on the monies lent by him is not liable to be added back under section 40(b) of the Act; and (b) similarly, if a person is a partner in his individual capacity and if such partner lends to the partnership monies belonging to the Hindu joint family, of which he is the " karta ", then the interest paid on the monies lent by the joint family is not liable to be added back under section 40(b) of the Act. The above amendment to the statute is clear acceptance of the views expressed by this court, the Gujarat High Court and the Madras High Court in the decisions above referred to. It is true that Explanations 2 and 3 inserted by the Taxation Laws (Amendment) Act of 1984 will be effective from the assessment year 1985-86. It is well to bear in mind that in the Statement of Objects and Reasons introducing the Taxation Laws (Amendme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... inciple enunciated by the Madras High Court is that the allowance or otherwise of interest shall have to be determined with reference to the real recipient of the interest and not merely with reference to the person formally receiving the interest. We are in entire agreement with this view. The principle of " real recipient" is as much applicable to salary as it is to interest. In some cases, salary may be paid to a partner under the agreed terms and conditions between the partners for services rendered by the partner individually in connection with the business carried on by the partnership; in some cases, the payment of salary may have connection with the investment of capital by the Hindu joint family whom the partner is representing in the partnership. In a case, where a person is a partner in his individual capacity and salary is paid to him for services rendered by him, individually in connection with the business carried on by the partnership, there can be little dispute that such salary paid to the partner falls to be disallowed under section 40(b) of the Act. If it is, however, found that the person concerned is not a partner in the partnership firm in his individual capac ..... X X X X Extracts X X X X X X X X Extracts X X X X
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