TMI Blog1978 (10) TMI 27X X X X Extracts X X X X X X X X Extracts X X X X ..... n appeal. The assessee took the matter to the Tribunal. The Tribunal considered the matter elaborately, and held that the three kartas were partners in the firm as representing their HUFs. The deposits were made by them from their own personal funds. The firm paid interest to them in their individual capacity and not as representing their HUFs. Since these three persons were partners in a different capacity, that is, as the kartas, the interest paid to them as individuals could not be held to be payment to a partner of the firm. It directed the deletion of the amounts in the assessment of the firm. At the instance of the CIT, the Tribunal has solicited our opinion on the following question of law : " Whether, on the facts and in the circumstances of the case, s. 40(b) of the I.T. Act, 1961, did not apply to the payment of interest to Sri C. L. Barry, I.L. Berry and P. K. Berry ?" Section 40(b) reads: "40. Notwithstanding anything to the contrary in sections 30 to 39, the following amounts shall not be deducted in computing the income chargeable under the head ' Profits and gains of business or profession',-... (b) in the case of any firm, any payment of interest, salar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... because the junior members become partners in the business. In short, the liability of the latter arises by reason of their status as coparceners and not by reason of any contract of partnership by them." Explaining the basis of this principle of law their Lordships further observed : "If members of a coparcenary are to be regarded as having become partners in a firm with strangers, they would also become under the partnership law partners inter se, and it would cut at the very root of the notion of a joint undivided family to hold that with reference to coparcenery properties the members can at the same time be both coparceners and partners." In CIT v. Bagyalakshmi Co. [1965] 55 ITR 660, the Supreme Court had occasion to consider certain basic principles. It was held : "If the distinction between three concepts is borne in mind much of the confusion disappears. A partnership is a creature of contract. Under Hindu law a joint family is one of status and right to partition is one of its incidents. The income-tax law gives the Income-tax Officer a power to assess the income of a person in the manner provided by the Act. Except where there is a specific provision of the Inco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ered as partnerships under the I.T. Act. The definition of person in the Act is intended for the purpose of levying income-tax and for other cognate matters. It may be observed that s. 4 which charges income-tax on income uses the word person as the subject-matter of the charge, but s. 40(b) with which we are concerned in the present case, does not use the word "person". On the other hand, it refers to payment to a partner. In Ram Laxman Sugar Mills v. CIT [1967] 66 ITR 613, the Supreme Court emphasised that a HUF is undoubtedly a person within the meaning of the Indian I.T. Act. It is, however, not a juristic person for all purposes, and cannot enter into an agreement of partnership with either another undivided family or individual. It is open to the manager of a joint Hindu family as representing the family to agree to become a partner with another person. The partnership agreement in that case is between the manager and the other person, and no member of the family, excepting the manager, acquires a right or interest in the partnership. The junior members of the family may make a claim against the manager for treating the income or profits received from the partnership as a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he assessee-firm paid interest on such borrowings. The claim for deduction of the interest so paid was disallowed. The contention that interest was paid to the proprietor of the business and not to the proprietor in his capacity as partner of the assessee-firm was overruled. It was held that interest was paid to the partner, and that there is nothing to indicate that the provision applies only to some categories of interest paid by a firm to a partner. Learned counsel for the assessee invited our attention to Addl. CIT v. Vallamkonda Chinna Balaiah Chetty and Co. [1977] 106 ITR 556 (AP). In that case, the principal point decided was whether the assessee had adopted a subterfuge to evade tax by changing the capital account from the name of the partner to that of the HUF represented by the partner. It was held that the capital was contributed by the family, and so the change was to indicate the real state of affairs. The attention of the Andhra Pradesh High Court was not invited to the various decisions mentioned above, in which it has been held that the character or capacity of the partner in which he received payment was immaterial. The fact that payment was made to him was enoug ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the partner at the time when he received the payment. The viewpoint expressed by T. S. Misra J. is hence not available. It is not the assessee's case that the payment of interest was not made in pursuance of the contract or with the consent of the partners. Gulati J. emphasised that the capacity in which a partner receives such payment is not very material. The payment should be in pursuance of the contract express or implied. In the present case, the assessee emphasises the capacity in which the partner received the payment, and not that the payment was not made with the consent, express or implied, of the partners of the firm. The observation of Gulati J. that the distribution of profits between the partners can only be according to the terms of the partnership arrived at between the partners by mutual consent does not help the assessee's case. It is well settled that even where the partnership deed states that a particular person is a partner as representing his HUF, the legal implication is that the person is a partner personally. The other family members are not. The capacity in which he receives the payment, namely, for and on behalf of the family, or for his own benefic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ., are disallowed on the ground that they are illegal distribution of the profits of the firm. Many kinds of expenses, though actually incurred, are disallowed as inadmissible deduction. Such amounts are taxed in the hands of the firm, though they are also assessed in the hands of the recipient of such payments on the ground that they constitute the latter's income. Section 167 of the I.T. Act deals with representative-assessees, and provides that the ITO has the same remedy against the representative-assessee as well as against the beneficiary direct. This provision, to which our attention was invited by learned counsel for the assessee, has no bearing on the question, which we have to resolve. The Tribunal laid emphasis on the method of computing a partner's share in the income of the firm given in s. 67 of the Act. We do not see how that helps. As already seen, the Supreme Court has laid down that the amounts paid to a partner are liable to assessed in the hands of the partner individually or the HUF, of which he is the representative, depending on the finding whether there was a direct connection between the contribution of the HUF and the payment. In case the HUF is found to ..... X X X X Extracts X X X X X X X X Extracts X X X X
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