TMI Blog1981 (7) TMI 34X X X X Extracts X X X X X X X X Extracts X X X X ..... nvoked s. 40(b) of the I.T. Act, 1961, and added back the interest so claimed while computing the taxable income of the firm. The amounts added back were Rs. 4,997, Rs. 7,625 and Rs. 14,872 for the assessment years 1971-72, 1972-73 and 1973-74, respectively. The officer took the view that since the payment of interest was made to Venkatesan as karta of the creditor family and since Venkatesan was a partner, the interest paid must be held to be a payment made to the partner and hence not deductible in terms of s. 40(b) of the I.T. Act. The AAC on appeal, confirmed the decision of the ITO. On further appeal by the assessee, the Appellate Tribunal also held that the ITO was correct in adding back in the firm's assessments, the interest paid to the HUF of the partner, Venkatesan. They expressed the view that s. 40(b) enacts an absolute prohibition, prohibiting the payment of interest to a partner in whatever capacity he might receive such interest. In this reference, at the instance of the assessee, we are asked to consider the correctness of the Tribunal's decision on the following question of law: " Whether, on the facts and in the circumstances of the case, the Appellate Tribuna ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... joint family, must nevertheless be disallowed and added back under the section. It may be that the hand, which actually might receive the interest or any other amount or object for and on behalf of the HUF is of its karta. But that cannot make any difference in substance. The interest really belonged to the HUF because it was the HUF which had advanced the amounts to the firm. Mr. J. Jayaraman, learned standing counsel for the I.T. department, submitted that the advances to the firm in this case cannot, in the eye of law, be regarded as having been effected by an HUF. His thesis was that for all legal purposes, the advances made by any joint family must be held to have been made only by the karta, and, in this case, by Venkatesan. It was but a step in his argument to point out that he was the partner of the firm and the payment is caught by s. 40(b). Learned counsel cited Ram Laxman Sugar Mills v. CIT [1967] 66 ITR 613 (SC), to support the position that a Hindu joint family is not a legal entity, such as might enter into dealings as such. Learned counsel submitted that although colloquially the HUF may be said to have advanced the moneys to the assessee-firm in this case and a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as to have some human activist to discharge its responsibilities and manage its affairs, even as an incorporated company must have managing director for its meaningful existence. It is only in this way that the karta figures in all transactions concerning the joint family. The transactions themselves are the family's transactions, and none the less so, for the fact that they have, per force, got to be put through by some one like the karta. But, as the Supreme Court have pointed out, this concept of a joint Hindu family, being a unit by itself, may not fit in with the requirements of some branches of the law, such as the law of partnership. Oar legal system thus lays down a double standard, as it were, in such cases. To take the matter of partnerships, as an example, the law governing partnerships does not recognize a joint family as such, as capable of becoming a partner, but it accepts the particular individual from the family as a partner, who alone has entered into the agreement of partnership. At the same time, however, the rules of Hindu law are not thereby abrogated. For, as between the member of the family who is partner in the firm, and the other members of the family who ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the Andhra Pradesh High Court are: CIT v. T. Veeraiah and K. Narasimhulu [1977] 106 ITR 283, Addl. CIT v. Chinna Balaiah Chetty and Co. [1977] 106 ITR 556 and Terla Veeraiah v. CIT [1979] 120 ITR 502. The decisions of the Allahabad High Court are : CIT v. London Machinery Co. [1979] 117 ITR 111, Radhey Shyam Sri Krishna v. ITO CIT v. Brijmohan Das Laxman Das [1979] 117 ITR 121 and Ram Lal and Sons v. CIT [1980] 124 ITR 157. We have studied all these decisions with the care and attention they deserve, but we may be pardoned if we confess to a sense of bewilderment, trying to understand their general trend. We may, however, observe that by and large, the tendency of recent decisions, both in the Andhra Pradesh High Court and in the Allahabad High Court. would seem to be to rule out the application of s. 40(b) to a case where interest is paid by a firm to an HUF of which one of the firm's partners happens to be the karta. Vide Terla Veeraiah v. CIT[1979] 120 ITR 502 (AP) and Ram Lal and Sons v. CIT[1980] 124 ITR 157 (All). We may observe that to the same effect is a decision of the Gujarat High Court in CIT v. Sajjanraj Divanchand [1980] 126 ITR 654 (Guj). It must, therefore, be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pplied in that case. Our only reflection about this case is that the arguments addressed by the assessee-firm before the learned judges could not carry them anywhere in their effort to keep out of s. 40(b) of the Act. For, it is unthinkable that a Hindu family, as such, could claim to be a partner in a firm. This, as we have earlier observed by reference to Ram Laxman Sugar Mills v. CIT [1967] 66 ITR 613 (SC), is an impossibility under our legal: system. The proper way of understanding Dwarkadas Rameshwar Goenka v. CIT is to regard it as a decision rejecting the legal argument that a joint family, as such, can be a partner. More particularly, it is a decision turning on its own facts, namely, that interest payments were made to the assessee's partners in their individual capacity, even though these partners represented their respective joint families. One other reported case remains to be noticed and that is A. S. K. Rathnaswamy Nadar Firm v. CIT[1965] 58 ITR 312 (Mad), a decision on which the Tribunal had relied in its order. That case, however, was not one where the claim by the assessee-firm was to deduct interest paid on borrowings. That was a case where the partner of a firm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... im for payment of interest of Rs. 4,997 and Rs. 7,625, respectively; as allowable deductions in the computation of the firm's income. Subsequently, however, the ITO sought to revise those assessments on the footing that the allowance granted by him for the payment of interest was a mistake and had to be rectified appropriately by invoking s. 40(b) of the Act. One of the questions debated before the Appellate Tribunal in regard to these two assessment years 1971-72 and 1972-73, was whether the ITO was justified in invoking his powers of rectification under s. 154 of the Act, for the purpose of going back on his original allowance of interest payments and for proceeding to add back by way of amendment of the assessment order. The assessee had argued before the Tribunal that what the ITO did was to review his, own earlier order of assessment and not really take up for rectification some mistake which might be regarded as one apparent from the record. The Tribunal rejected this contention and, held that the ITO had jurisdiction to proceed under s. 154 of the Act, since the allowance of the interest payments in the original assessment can well be regarded as a mistake apparent from the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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