Hiralal Kasturchand vs Commissioner of Income Tax

G.G. Sohani, Actg. C.J.

By this reference u/s 256(1) of the Income Tax Act, 1961 (hereinafter referred to as "the Act"), the Income Tax Appellate Tribunal, Indore Bench, has referred the following question of law to this court for its opinion :

"Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that interest paid to the Hindu undivided family accounts of the partners was liable to be disallowed u/s 40(b) of the Income Tax Act ?"

The material facts giving rise to this reference, briefly, are as follows ;

The assessee is assessed in the status of a registered firm and the assessment years in question are 1981-82 and 1982-83. While framing the assessment, the Income Tax Officer noted that the assessee had paid interest to the Hindu undivided families of the partners of the firm and that the partners of the firm were kartas of their respective Hindu undivided families. The Income Tax Officer, therefore, held that the interest paid to the Hindu undivided families of the partners was not deductible in computing income by virtue of Section 40(b) of the Act. The appeal preferred by the assessee before the Appellate Assistant Commissioner was dismissed. The second appeal preferred by the assessee before the Tribunal was also dismissed. Aggrieved by the order passed by the Tribunal, the assessee sought reference and it is at the instance of the assessee that the aforesaid question of law has been referred to this court for its opinion.

At the time of hearing, learned counsel for the Revenue conceded that the matter arising in this case is governed by a decision of the Full Bench of this court in Commissioner of Income Tax Vs. Narbharam Popatbhai and Sons, . In view of this decision, it must be held that the Tribunal was not right in holding that the interest paid to the Hindu undivided families of the partners of the assessee-firm was liable to be disallowed u/s 40(b) of the Act.

For all these reasons, our answer to the question referred to this court is in the negative and in favour of the assessee. In the circumstances of the case, parties shall bear their own costs of this reference.