1984-VIL-522-KAR-DT
Equivalent Citation: [1985] 152 ITR 423, 46 CTR 96, 20 TAXMANN 394
KARNATAKA HIGH COURT
Date: 13.09.1984
COMMISSIONER OF INCOME-TAX, KARNATAKA (CENTRAL)
Vs
KHODAY ESWARSA AND SONS
BENCH
Judge(s) : K. JAGANNATHA SHETTY., S. A. HAKEEM
JUDGMENT
The judgment of the court was delivered by
JAGNNATHA SHETTY J.-The following question under s. 256(i) of the I.T. Act, 1961, has been referred :
" Whether, on the facts and in the circumstances of the case, interest payment of Rs. 11,365 to Smt. K. L. Gangamma, who was one of the partners of the firm on the date of payment of interest, can be disallowed under section 40(b) of the Income-tax Act, 1961 ? "
The assessee is a firm. Originally it was constituted by an instrument dated November 21, 1969. Clause 10 of that instrument provides that in the event of death of a partner, the firm shall not be dissolved but shall be carried on by the remaining partners with the legal representatives of the deceased partner on such terms and conditions as may be agreed upon in that behalf by mutual consent.
On July 30, 1973, Sri. K. Lakshmansa, one of the partners, died and a new partnership deed was executed on February 17, 1974, taking Smt. Gangamma, widow of Sri K. Lakshmansa, as a partner with effect from July 31, 1973. She was taken as a partner since she represented the estate of her deceased husband.
Smt. Gangamma in her individual capacity advanced some amount to the firm and the firm paid interest on that amount. We are concerned in regard to such interest paid to Smt. Gangamma during the year relevant to the assessment year 1974-75, which in all came to Rs. 11,365. The ITO disallowed the said payment under s. 40(b) of the I.T. Act.
The assessee appealed to the AAC who allowed that claim of the firm on the ground that s. 40(b) of the Act was not attracted to such payment since it was paid to Smt. Gangamma in her individual capacity on her own funds and not on any asset belonging to the deceased Lakshmansa.
Aggrieved by the order of the AAC, the Department preferred an appeal before the Tribunal. The Tribunal gave some more reasons. It observed that, in view of the terms of the partnership deed, Smt. Gangamma became a partner not in her individual capacity, but as the executrix of the estate of late Lakshmansa. Since Smt. Gangamma was not a partner in the firm in her individual capacity, the interest paid to her on her separate fund is not covered by s. 40(b) of the Act.
The question herein is whether the view taken by the Tribunal could be sustained under the provisions of s. 40(b) of the Act. 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, salary, bonus, commission or remuneration made by the firm to any partner of the firm; "
The scope of this section is no longer in dispute. It imposes a bar to allowances in respect of any payments by way of interest, salary, bonus, commission or remuneration made by the firm to any of its partners. The prohibition contained in this clause is absolute and makes no distinction between the payments by way of interest, commission, etc., made to a partner as a partner and such payments made to him in a different character, i.e., in his personal capacity when he is a karta of a joint family or in his capacity as a proprietor of an independent concern. This was also the view taken by a Division Bench of this court in Anniah & Co. v. CIT [1975] 101 ITR 348, wherein it was observed that s. 40(b) is attracted even in regard to payment of salary made by a firm to any partner irrespective of the character in which the person has become a partner of a firm. Therefore, the capacity with which an individual becomes a partner of firm has nothing to do with the allowances prohibited under s. 40(b). partner may have a dual capacity as an individual by himself or as a representative of another assessable entity, but when once he becomes partner, the bar imposed under s. 40(b) is immediately attracted. Therefore, the Tribunal, in our opinion, is not correct in taking into consideration the dual capacity of Smt. Gangamma while considering the scope of s. 40(b).
In the result, we answer the question in the negative and in favour of the Revenue.
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