L. Chhotalal and Co. vs Commissioner of Income Tax

Poti, C.J.—This is a reference at the instance of the assessee, a registered firm, and relates to the assessment years 1970-71 and 1971-72, the corresponding accounting years being that ending on 30-6-1969 and 25-3-1970. One Shri C.S. Virani was a partner of the applicant-firm and he joined the partnership representing the HUF of which he was the ''karta''. For the two accounting years, in question, Shri C.S. Virani maintained two accounts with the partnership-one his own individual account and the other of the HUF which he represented as ''Karta''. The firm paid interest on advances made other than the capital by the HUF represented by Shri C.S. Virani and also advance made by Shri Virani, from his own personal account. The interest so paid on individual funds for the assessment year 1970-71 was Rs. 1,30,594 and interest paid on account of the HUF was the sum of Rs. 26, 482. These payments were disallowed by the ITO, who relied on section 40(b) of the income tax Act, 1961 (''the Act''), for adopting such a course. Similar interest paid during the assessment year 1971-72 was disallowed, that being a sum of Rs. 1,37,606 paid on Shri C.S. Virani''s personal account and a sum of Rs. 13,929 paid on HUF account. The assessee took up the matter of assessments in appeal before the AAC but the claim in regard to disallowance of interest paid on account of the HUF was given up in appeal. The AAC rejected the claim of the assessee in regard to the disallowance of interest paid on the individual account held by Shri C.S. Virani and this was confirmed by the Tribunal in further appeal.

The question that was referred to this Court in the background of these facts is, whether the Tribunal was justified in law in confirming disallowance of Rs. 1,30,594 for the assessment year 1970-71 and Rs. 1,37,606 for the assessment year 1971-72, being interest paid to Shri C.S. Virani, individual, u/s 40(b).

When the reference came up before a Division Bench of this Court, it was felt that the decision of this Court in Commissioner of Income Tax, Gujarat-III Vs. Sajjanraj Divanchand, required reconsideration and, therefore, reference was made to a larger Bench. That is how the case is now before a Full Bench.

Now, we may refer to the provisions of the Act which may have relevance in deciding the question in controversy before us. Sections 30 to 39 of the Act provide for various allowances and deductions to be made in computing the income chargeable under the head ''Profits and gains of business or profession''. Though generally these deductions are to be made for the purpose of determining the net income of any assessee, section 40 envisages situations where some of the deductions are not to be made and some are to be made in a modified manner in the case of certain classes of the assessees. Clause (a) deals with the case of any assessee, clause (b) deals with the case of any firm, clause (c) deals with the case of any company and clause (d) deals with the case of a banking company. We are concerned for the purpose of this case only with section 40(6). That section reads:

"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'',-

(a) ****

(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 provision corresponding to this in the Indian income tax Act, 1922 (''the 1922 Act''), is section 10(4)(6) and the only difference between the said section 10(4)(6) and section 40(6) of the 1961 Act, is that in the later section, as it stands, besides interest, salary, commission or remuneration, bonus is also referred to. It may be noticed that section 10(4)(6) was brought into the 1922 Act by the amendment effected in 1939 and the legislative history is sufficient to indicate that the provisions in section 40 are intended to prevent siphoning off the profits in some form or other so as to reduce the tax liability and in the case of a firm, this siphoning off is envisaged by payment to a partner of a portion of the profit in one form or another as envisaged in the section, viz., by way of interest, salary, bonus, commission or remuneration. Evidently, that is the reason why though normally any interest paid other than the interest paid on the capital would be an allowable item of expenditure u/s 37, special provision was made in section 40(6) to see that such payment of interest is taken out of the scope of ''allowable expenditure''. Same is the approach towards salary, bonus, commission or remuneration.

The case of the assessee, after he filed the appeal before the AAC has all along been that though payment of interest on the advances made by the HUF could be disallowed, in view of the fact that Shri C.S. Virani was representing the HUF as partner in the firm, there is no justification for disallowance of interest payable to him, not in the capacity of the ''karta'' of the firm, which he represented, but on advance made from his own individual funds, properly shown as in his individual account.

Section 184 of the Act deals with registration of a firm for the purpose of the Act. Assessment of registered firms is dealt with in section 182 of the said Act and the assessment of unregistered firms is dealt with in section 182. It may be profitable here to refer to certain definitions in the Act. A firm, a partner and partnership have been defined in section 2(23) of the Act as having meanings respectively assigned to them in the Indian Partnership Act, 1932 (9 of 1932); but the expression ''partner'' shall also include any person who, being a minor, has been admitted to the benefits of partnership. It may be necessary to notice here that the definition section starts with the preface "In this Act, unless the context otherwise requires".

We have already adverted to section 182. That section provides that in the case of a registered firm, after assessing the total income of the firm, the income tax payable by the firm shall be determined and the share of each partner in the income of the firm shall be included in his total income and assessed to tax, accordingly. The Act contemplated determination of the total income of the firm, assessment of the firm on such total income and apportionment of the total income to the partners for the purpose of computing the income of the partners in the assessment of the partners. We may now advert to section 67 of the Act. This deals with the ''method of computing a partner''s share in the income of the firm''. It may not be necessary to refer to the ''method of computation'' itself. It will be sufficient to point out that the section lays down the detailed procedure as to how the partner''s share in the income of the firm is to be reckoned when the partner is assessed.

The short question that arises for decision in this reference concerns the scope of section 40(b), to which we have already made a reference. ''Disallowance'' contemplated there in of ''interest'' is, according to the revenue, disallowance of any interest paid to the partner- whether in his ''individual account'' or in the ''account of the HUF'', which he represents as a partner in the partnership. In justification of this course, the revenue pleads that under the law of partnership, a HUF is never taken to be a partner. Partnership being a relationship created by contract, only the parties to the contract are recognised as partners and that being so, irrespective of the capacity in which a partner acts, whatever interest is paid to the partner from the firm, is, according to the revenue, to be disallowed, invoking section 40(b).

As against this, the contention of the assessee is that, since at the stage section 40(b) is applied, the ITO is concerned only with the assessment of the firm and not of the individual partner on his income, the ''disallowance'' envisaged by the section is only that of payment made to the partner concerned in the capacity in which he is such a partner. It is said that reading otherwise would defeat the very object of the section. It is further said that whatever disability there may be between partners to plead beyond the terms of contract of partner ship, there is no bar in the revenue, while enforcing the law relating to income tax, from recognizing the reality and dealing with the assessee on the basis of that reality. In other words, while, as between partners, one partner will not be permitted to urge that though he is the partner appearing on the face of the agreement of partnership, it is not he who is really a partner, but the HUF which he represents; so far as the revenue is concerned, there is no bar in treating the partner as representing a HUF and that being the reality, in assessing in accordance therewith.

As we noticed earlier, while all interest payments from the business should normally be treated as revenue expenditure, allowable in determining the net income of the assessee, the purpose for which section 40(6) operates is evidently to prevent siphoning off by a firm of any of its profits by payment of interest, some times inflated, to its partners and, thus, reducing the assessable income of the firm. There will be no objection in paying interest to the creditors in the usual course and that will be permissible expenditure and if a person hap pens to be a partner in his capacity, say as a trustee, there is no reason why any interest paid to him in his individual capacity on his individual account should not be allowed as an item of revenue expenditure.

It may be profitable here to refer to certain decisions which may have a bearing in under standing the question of the relationship of partners inter se and the rights of a HUF represented in a firm by one of its members as against the firm. The following passage from Maynes Hindu Law, 9th edn., at page 398, quoted by Privy Council in AIR 1934 192 (Privy Council) , may be reproduced:

"Where a managing member of a joint family enters into a partnership with a stranger the other members of the family do not ipso facto become partners in the business so as to clothe them with all the rights and obligations of a partner as defined by the Indian Contract Act. In such a case the family as a unit does not become a partner, but only such of its members as in fact enter into a contractual relation with the stranger: the partnership will be governed by the Act." (p. 194)

The same passage has been quoted by the Supreme Court in the decision in Charandas Haridas and Another Vs. The Commissioner of Income Tax, Bombay North, Kutch, Saurashtra and Ahmedabad and Another, , and the Supreme Court goes on to observe:

"In our opinion, here there are three different branches of law to notice. There is the law of partnership, which takes no account of a Hindu undivided family. There is also the Hindu law, which permits a partition of the family and also a partial partition binding upon the family. There is then the income tax law, under which a particular income may be treated as the income of Hindu undivided family or as the income of the separated members enjoying separate shares by partition. The fact...Just as the fact of a karta becoming a partner does not introduce the members of the undivided family into the partnership, the division of the family does not change the position of the partner vis-a-vis the other partner or partners. The income tax law before the partition takes note, factually, of the position of the karta, and assesses not him qua partner but as representing the Hindu undivided family. In doing so, the income tax law looks not to the provisions of the Partnership Act, but to the provisions of Hindu law. When once the family has disrupted, the position under the partnership continues as before, but the position under the Hindu law changes. There is then no Hindu undivided family as a unit of assessment in point of fact, and the income which accrues cannot be said to be of a Hindu undivided family...." (p. 208)

In the decision in Commissioner of Income Tax, Gujarat Vs. A. Abdul Rahim and Co., , the Supreme Court had to consider whether a benamidar can, in law, be a partner of a firm; the benamidar has no beneficial interest in the property or business that stands in his name. He represents, in fact, the real owner. Referring to the Madras High Court decision in Aruna Group of Estates Vs. State of Madras, the Supreme Court expressed the view that the benami character did not affect the benamidar''s capacity as partner or his final relationship with the other members of the partnership. In this case, the Court said:

"If so, what is the principle of law which prohibits the benamidar of a partner from being also a partner along with the said partner with other? Qua the other partners, he has separate and real existence; he is governed by the terms of the partnership deed; his rights and liabilities are governed by the terms of the contract and by the provisions of the Partnership Act; his liability to third parties for the acts of the partnership is co-equal with that of the other partners; the other partners have no concern with the real owners; they can only look to him for enforcing their rights or discharging their obligations under the partnership deed. Any internal arrangement between him and another partner is not governed by the terms of the partnership; that arrangement operates only on the profits accruing to the benamidar; it is outside the partnership arrangement. If a benamidar possesses the legal character to enter into a partnership with another, the fact that he is accountable for his profits to, and has the right to be indemnified for his losses, by a third party or even by one of the partners does not disgorge him of the said character." (p. 658)

The same principle was reiterated by the Supreme Court in Commissioner of Income Tax, Madras Vs. Bagyalakshmi and Co., Udamalpet, It may be profitable to extract the following passage from the above judgment:

"We have held in Commissioner of Income Tax, Gujarat Vs. A. Abdul Rahim and Co., that the income tax Officer can reject the registration of a firm if it is not genuine or valid and if the application for registration has not complied with the rules made under the Act. Here we have admittedly a genuine partnership. It cannot even be suggested that it is invalid. The only objection is that Guruswamy Naidu and Venkatasubba Naidu have less shares in the partition deed than those shown in the partnership deed. If the distinction between the 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 income tax Act which derogates from any other statutory law or personal law, the provision will have to be considered in the light of the relevant branches of law. A contract of partnership has no concern with the obligation of the partner to others in respect of their shares of profit in the partnership. It only regulates the rights and liabilities of the partners. A partner may be karta of a joint Hindu family; he may be a trustee; he may enter into a sub-partnership with others; he may, under an agreement, express or implied, be the representative of a group of persons; he may be a benamidar for another. In all such cases he occupies a dual position. Qua the partnership, he functions in his personal capacity; qua the third parties, in his representative capacity. The third parties, whom one of the partners represents, cannot enforce their rights against the other partners nor the other partners can do so against the said third parties. Their right is only to a share in the profits of their partner-representative in accordance with law or in accordance with the terms of the agreement, as the case may be. If that be so, Guruswamy Naidu could have validly entered into a genuine partnership with others taking a 10 annas share in the business, though in fact as between the members of the family he has only a 2 annas share therein. He would have been answerable for the profits pertaining to his share to the divided members of the family, but it would not have affected the validity or genuineness of the partnership. So much is conceded by the learned Attorney-General. If so, we do not see why a different result should flow if instead of one member of the divided family two members thereof under some arrangement between the said members of the family took 10 annas share in the partnership. If the contention of the revenue was of no avail in the case of representation by a single member, it could not also have any validity in the case where two members represented the divided members of the family in the partnership. As the partnership deed was genuine, it must be held that the shares given to Guruswami Naidu and Venkatasubba Naidu in the said partnership are correct in accordance with the terms of the partnership deed." (p. 664)

The passage from Mayne''s Hindu Law, 9th edn., which we have extracted earlier, was again noticed by the Supreme Court of India in Commissioner of Income Tax, Madhya Pradesh, Nagpur and Bhandara Vs. Hukumchand Mannalal and Co., and referring to the following passage in Ram Laxman Sugar Mills v. CIT [1961] 66 ITR 613 :

"This position in law was not disputed on behalf of the Commissioner. But it was urged that since two members of a coparcenary represented-, in the firm, the same beneficial interest of a Hindu undivided family and since they were incompetent to enter into a contract inter se, the partnership agreement could not be registered. There is no substance in that contention...." (p. 20)

The Supreme Court said:

"It is clearly enunciated that one or more members of Hindu undivided family may enter into a contractual relation in the nature of a partnership with a stranger and they qua the stranger become partners. The view expressed by the Judicial Committee was approved by this Court in Charandas Haridas and Another Vs. The Commissioner of Income Tax, Bombay North, Kutch, Saurashtra and Ahmedabad and Another, ." (p. 21)

The position, therefore, is well settled that there is no impediment in a HUF becoming a partner of a firm through its representative. Such a partnership will not be invalid or against law, but partnership being a relationship between persons who have agreed to share the profits of a business carried on by all or acting for them all and the relationship of partnership being one that arises from a contract, the persons who come together in the partnership will be recognised as between them as partners. In a case where one of the partners represents a HUF or is a trustee of a trust, the members of the family or the beneficiaries in the trust, as the case may be, cannot exercise rights which their representative can exercise as against the other partners. They cannot sue on behalf of the firm for settlement of accounts and cannot exercise any rights as against the other partners as if they are themselves the partners in the partnership firm. This is not to say that they have no rights at all arising from the fact that the partner is their representative. They can make their representative accountable to them. They can seek to enforce his obligations and the representative will be bound to observe all obligations which law casts on him as such representative. Where one of the partners is really a representative of others, third parties are not barred from dealing with him in his representative capacity, for, they are not parties to the contract of partnership. The revenue is in no way precluded from dealing with the partner as a representative if he is one such, as for instance, where he is a ''karta'' of a HUF. The income derived by him as a partner would really be income of the HUF and really derived by the HUF. Of course, when the ITO has granted registration to the firm, the firm has to be assessed and the next logical step is to assess the partners taking into account also the income of the partners derived from the firm. In doing so, if the partner is receiving income on behalf of a trust, it is the trust that has to be assessed on that part of the income, or, in other words, he is to be assessed as a trustee and not in his individual capacity. If it is a HUF on behalf of which he receives the income, the partner being its representative, it is the income of the family which is ultimately to be assessed. The revenue also cannot have a different case as it is seen that after determining the net divisible income of the firm for the year 1970-71 as Rs. 2,36,560, the ITO proceeds to pass an order u/s 184 granting registration to the firm for that year and further proceeds to pass an order u/s 158 of the Act as follows:

Total income is allocated amongst the partners as under:

Name of the assessee

Share

Profit Rs.

Interest Rs.

Total Rs.

Reference

Shri Chhotalal S. Virani HUF

one-fourth

18.178

1,57,075

1,75,254

�

Priyavanda C. Virani trustee of Subba trust

one-fourth

18,178

2,258

20,436

�

Subba C.Virani trustee Chhotalal trust

one-fourth

18,177

2,258

20,436

�

Sunanda C. Virani trustee of Priyavanda trust

one-fourth

18,177

2,256

20,436

�

Total

72,710

1,63,850

2,36,560

�

Evidently, Shri C.S. Virani has been allocated one-fourth of the profit and to that is added interest paid to Shri C.S. Virani in his ''individual'' account as well as interest paid to the HUF and the total allocation is, thus, Rs. 1,75,254. Similar allocation is made for the next assessment year 1971-72 also as seen from the order of the ITO u/s 158 of the Act, which is reproduced herein below:

Name of the assessee

Share

Profit Rs.

Interest Rs.

Total Rs.

Shri Chhotalal S. Virani (HUF)

one-fourth

43,027

3,330

1,37,606

1,40,936

1,83,963

Shri Subba trust

one-fourth

43,026

3,533

46,559

Shri Chhotalal trust

one-fourth

43,026

3,533

46,559

Shri Priyavanda trust

one-fourth

43,026

3,533

46,559

Total

1,72,105

1,51,535

3,23,640

We are only pointing out that rightly the ITO has noticed in the order u/s 158 that Shri C.S. Virani is representing the HUF.

The revenue is not precluded from looking into the real character of the partner and the capacity in which he represents himself in the partnership firm. If that be so, for the purpose of section 40(b), is the revenue to take note of the representative character of the assessee and make disallowance falling within the section in accordance therewith? That is the question which we are really called upon to answer here.

What is said for the revenue is that while the revenue may take note of the fact that Shri C.S. Virani really represents a HUF when it makes the individual assessment on the HUF of which he is a representative, that will have no bearing when the revenue seeks to assess the firm to its tax. At that stage, it is said, the real character of Shri C.S. Virani does not call for consideration and he need be treated only as a partner and, if so treated, whatever is paid as interest to Shri C.S. Virani irrespective of the character in which such payment is made, is to be disallowed on account of section 40(b). This approach would assume that so far as the revenue is concerned, the revenue cannot take note of the capacity in which a person happens to be a partner of a firm. Such an approach is unsustainable in law, for whatever may be the obligations as between the partners, arising out of a contract, so far as the revenue is concerned, it is the real character of the partner who is assessed that would be relevant for assessment purpose. If Shri C.S. Virani is a partner as representing a HUF, at all times, the revenue can only treat him as representing HUF, whatever may be the rights of the other partners in the firm as against him. If so, when Shri C.S. Virani, as representing the HUF, has advanced funds of the HUF to the firm and interest thereon is paid to the HUF, it is interest paid to Shri C.S. Virani, the partner. If he advances amounts from his individual account when he is a partner as representative only of the HUF, the interest is not paid to him qua as a partner but as a stranger.

We should point out an anomaly if a different view is taken. Supposing a stranger advances a substantial sum of money to a firm on interest and the interest is being paid by the firm to that stranger, such interest payments could be deductible as revenue expenditure u/s 37. If by some fortuitous circumstance, such stranger becomes a trustee of a trust, the previous trustee of which was a partner of that firm, can it, for that reason, be said that the interest which had to be paid to him, as was done earlier, not as trustee but on his own individual account, should no longer be an item of expenditure to be deducted? We see neither reason nor logic in such an approach. If the income tax authorities are to act on the basis of real facts and not on any assumptions, then, for the purpose of section 40(6), they will have to consider the HUF as represented by Shri C.S. Virani as the partner and if that is so, what is paid to Shri C.S. Virani as representing HUF by way of interest will alone fall within the section.

We had the benefit of hearing in this case besides Mr. K.C. Patel, the counsel for the assessee, and Mr. B.R. Shah, the counsel for the revenue, Mr. N.R. Divetia who intervened apprehending that what may be observed in this case may be of consequence to his clients in other cases and, therefore, he must have a hearing. We are happy to have his assistance in the case. Evidently, the anxiety of the counsel is that earlier decision in CIT v. Sajjanraj Divanchand''s case (supra) should be sustained and what we may say here may not detract from the authority of that decision. It is necessary to advert to the facts of that case. The assessee was a registered firm doing business in cloth. It had three partners, one of whom, Sajjandas Jwaladas, had joined the partnership in his capacity as the ''karta'' of the joint Hindu family of Sajjandas Jwaladas. During the year in question, the firm paid interest amounting to Rs. 7,777 to the HUF. Involving section 40(6), the ITO disallowed the deduction. The appeal to the AAC having been dismissed, the assessee took the matter to the Tribunal. The Tribunal held that the amount of Rs. 7,777 must be deducted as expenditure in the assessment of the firm. At the instance of the revenue, the matter came up before this Court. In that case also, there were two separate accounts-one the HUF account and the other individual account-and the amount of Rs. 7,777 was paid by way of interest to the HUF account. Dealing with this question, the Court observed:

"...The fact that the ''karta'' of the HUF was a partner of the assessee-firm was not relevant because, u/s 40(6), 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 section 40(6)." (p. 655)

This was considered to be the correct legal position and, therefore, it was found that the sum paid to the HUF cannot fall within the mischief of section 40(6). The Court ultimately said:

"Under these circumstances, in every case the test to be applied is as to who is the partner of the firm and irrespective of the character in which he is the partner of the firm, whether any interest is paid to him as partner. If the creditor of the firm is not the partner but the HUF of which the partner is the karta, then a separate entity is the creditor of the firm and interest paid to that separate entity will not be governed by section 40(6) and cannot be disallowed." (p. 662)

Based on this approach, the counsel, Shri Divetia, contended that what is to be disallowed is not the interest paid to the partner in his individual account even if the partner only represents the HUF but what is paid into the HUF account. This is so because, according to the counsel, the partner is only the ''individual'' and not the ''HUF'' and if so, what is paid to the ''individual'' alone is to be disallowed and what is paid to the HUF is not to be. We think that such an approach evidently springs from a misconception that the income tax authorities are precluded from noticing that the partner represents a HUF and not himself in the firm. If, as a matter of fact, the income tax authorities are precluded from going into that question and have to treat the partner whose name appears in the partnership as the only person who is to be treated as a partner, then the result may perhaps be that the amounts paid into his accounts, whether it be into the HUF account standing in his name or his personal account, both will have to be disallowed as falling u/s 40(6), a situation which may perhaps be to the advantage of the revenue.

Once we accept the situation that contracting partners alone are bound by the terms of the contract and it is open to the revenue to see the partner as he really is, it goes without saying that when he represents a HUF that has to be disallowed and not any interest paid into his individual account as interest in lieu of advance made by him personally. Even if he happens to be the ''karta'' of the HUF but he becomes a partner in his own account and amounts are advanced to the firm by him from his individual account and also by the HUF, the amount of interest paid to the HUF account cannot be disallowed, while the interest paid in his individual account has to be disallowed. That is not the situation here. We are not persuaded to agree with the approach made in the case reported in Sajjanraj Divanchand''s case (supra), for the reasons we have explained herein. We think that that decision has necessarily to be overruled.

We may advert to the decision of the Gujarat High Court in Dinubhai Ishvarlal Patel Vs. K.D. Dixit, Income Tax Officer, Ahmedabad and Others, , which, in a way, supports the approach made by us in this case. Where the assessee is a partner in a firm in his capacity as karta of a HUF, the share income of his wife or so as partners of the firm cannot be included in the assessment of the HUF. That is because section 64(1)(ii) of the Act speaks of an ''individual''. That necessarily indicates that only in a restricted sense the term has been used, viz., that of ''individual'' capable of having a wife or minor child or both and would, therefore, necessarily exclude from its purview other units. It was found in that case that though the ''karta'' was a partner qua his other partners as an ''individual'' and he functions qua the other partners in his personal capacity, qua the members of his HUF, he is in his representative capacity, and, therefore, the revenue cannot treat him as an ''individual'' within the meaning of section 64(1)(ii). That indicates an approach similar to that we have made in this case. We notice that the view taken here has been taken by the Bombay High Court in a recent case of CIT v. Pannalal Hiraial & Co. [1983] 15 Taxman 242. The facts are more or less similar to the facts here. The question there was of disallowance of interest paid on a personal loan by a representative of a HUF, who was a partner of a firm as such representative. In a rather short judgment, the Court expressed the view that the interest paid to the partner was in his capacity as an ''individual'' and though he was a partner in the firm, he was not a partner in his individual capacity but as representing the HUF. Therefore, it was held that the interest paid to him in his individual capacity cannot be payment made to a partner for the purposes of attracting the provisions of section 40(6). Though we notice that the Court relied on an earlier decision of that Court in CIT v. Hansa Dyeing & Printing Works 1976 CTR (Bom.) 482, which is said to support the view, it is doubtful whether in that case, which related to rectification proceedings, the Court had expressed an opinion which may support the view expressed in Pannalal Hiralal & Co.''s case (supra). We are not proposing to go into the decisions concerning payment of salary to a partner, for such payment stands on a footing different from the payment of interest. Payment of interest on amounts lent to the firm can be traced either to the individual or to the representative body by tracing the nature of the funds advanced, but not so labour by a partner (sic). Whether he works in the firm and receives salary as an individual or as a representative of the family cannot be known from the way he functions and, therefore, payment of salary must stand on a different footing.

Before we close, we have to refer to a decision brought to our notice by Shri N.R. Divetia and on which considerable reliance has been placed by him in support of his stand that it is the interest paid to the HUF that must be disallowed even though the partner is in the firm in his representative capacity. We do not think that the decision of the Supreme Court in Rameshwari Lal Sanwarmal Vs. Commissioner of Income Tax, Assam, , relied on by the counsel, would be of any assistance in this case. That is a decision rendered in a different set of circumstances, That relates to the application of the definition in section 2(6A)(e) of the 1922 Act, whether loan advanced to persons who are really not the shareholders but whose representative was said to be the shareholder, should fall within the scope of the definition of ''dividend''. The Court had to consider the question found on the definition. Under the circumstances of the case, the Court took the obvious view that where it is not paid to the shareholder, the definition cannot be applied and as to who a ''shareholder'' was, the Court took the view that a ''registered shareholder'' was the ''shareholder'' for the purpose of the definition. The concept that we have to deal with is necessarily different. We have to under stand the scheme in the background of the object sought to be achieved by section 40(b). On the facts and in the circumstances of this case, we, therefore, answer the question referred to us in the negative, i.e., in favour of the assessee and against the revenue. No costs.