TMI Blog1980 (8) TMI 77X X X X Extracts X X X X X X X X Extracts X X X X ..... ng year under consideration the assessee firm had paid interest amounting to Rs. 7,777 to the said HUF. The ITO, impliedly applying the provisions of s. 40(b) of the I.T. Act, disallowed the deduction of the said expenditure. The assessee went in appeal to the AAC but the appeal on this point was dismissed. On further appeal, the Tribunal held that the view taken in the case of this very assessee by Bench of the Tribunal for the assessment year 1971-72 was the correct view and following that view the Tribunal held that the amount of Rs. 7,777 should be allowed to be deducted as an expenditure in the assessment of the firm. Thereafter, at the instance of the revenue, the question hereinabove set out has been referred to us for our opinion. In order to appreciate the rival contentions, it is necessary to refer to some of the provisions of the I.T. Act, 1961. Under a. 28, income referred to in the clauses of that section shall be chargeable to income-tax under the head " Profits and gains of business or profession ". Section 29 lays down that the income referred to in s. 28 shall be computed in with the provisions contained in ss. 30 to 43A. Ordinarily, interest paid by a firm on mo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... herefore, the entire basis on which the AAC expressly proceeded and the ITO impliedly proceeded in the instant case is untenable. The fact remains that there were two separate accounts and in the account of the HUF it was shown that the HUF was the creditor of the firm and on the amount standing to the credit of the HUF interest of Rs. 7,777 was paid by the firm to the HUF. There was a separate account of the individual partner, Sajjandas Jwaladas, and in that account no interest appears to have been paid in the year under consideration. Under these circumstances, it is obvious that the amount of Rs. 7,777 was paid by way of interest to the HUF which was the creditor of the firm. The fact that the karta of the HUF was a partner of the assessee-firm is totally beside the point because under s. 40(b) it is only the interest paid to the partner which is not allowed to be deducted. Interest paid to any other creditor of the firm cannot be disallowed under the provisions of a. 40(b). This being the correct legal position, it is obvious that the Tribunal was right in coming to the conclusion that it did, namely, that the amount of Rs. 7,777 did not fall within the mischief of s. 40(b) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mily could not be treated as interest paid to the partners so as to bring it within the scope of cl. (b) of s. 40 of the I.T. Act, 1961, and deleted the amount in computing the assessee's profits, This was confirmed by the Appellate Tribunal. On a reference made to the High Court at the instance of the revenue, the Andhra Pradesh High Court held that the capital contributed by the partner was as a partner though the funds might have emanated from the joint family, that the joint family which could not itself be a partner, had not made any investment in the firm independently of the capital contributed by karta as a partner and that, therefore, it did not cease to have the characteristics of a capital investment by a partner, the interest on which was not deductible from the income of the firm under s. 40(b) of the Act. With great respect to the learned judges of the Andhra Pradesh High Court, we are unable to agree with the reasoning of this decision because what is to be looked at is, who is the creditor of the firm. If, in fact, the HUF is not the creditor of the firm and yet some amount of interest is purported to have been paid by the firm, then of course the amount cannot be a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... firm, there was no reason why there should be two separate accounts and the interest paid to the partners should be transferred to the account of the HUF. In that case, apparently the Division Bench found that the real creditor of the firm was the individual partner and not the respective HUF. That is the reason why the Division Bench of the Andhra Pradesh High Court decided in favour of the revenue and reversed the finding of the Tribunal in that particular case. The next decision to which our attention was drawn is also the decision of the Andhra Pradesh High Court in Addl. CIT v. Vallamkonda Chinna Balaiah Chetty and Co. [1977] 106 ITR 556. In that case the assessee-firm consisted of four partners, one of whom was R representing R's HUF. In the partnership there was no stipulation as to investment of capital by any of the partners. R's family advanced some moneys to the firm and the same was credited by the firm in the name of R who was also the karta. Up to the assessment year 1967-68, interest was credited to the account of R. Capital account in the firm was also in the name of R. But for 1967-68, the account was changed to " R's family account ". The firm paid Rs. 4,068 to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n under the Partnership Act or under the I.T. Act. The Andhra Pradesh High Court again considered its earlier decision in Terla Veeraiah v. CIT [1979] 120 ITR 502. In that case there was an HUF consisting of P, his son, V, and grandson, S. There was a partition of the HUF properties and the three coparceners, P, V and S, formed a partnership firm under a deed dated December 12, 1962. They were carrying on business in the name of the firm. On January 9, 1969, P died and his son, V, succeeded to his entire property including the share in the partnership firm. The share income in respect of the share inherited by V from P had been assessed in the status of HUF in the hands of V. The account which stood in the name of P and was succeeded to by V, was credited to separate account. The account as partner was styled as " Terla Veeriah (HUF) Account". For the assessment years 1970-71 and, 1971-72, interest received from the partnership, namely, Rs. 7,890, was credited to the individual account of V and another sum of Rs. 8,585 to the account of Terla Veeriah (HUF) Account. The claim of the assessee in respect of deduction of Rs. 7,890 was disallowed by the ITO under s. 40(b) of the Act on ..... X X X X Extracts X X X X X X X X Extracts X X X X
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