Shakuntala Industries vs Commissioner of Income Tax

V.K. Singhal, J.—The Income Tax Appellate Tribunal has referred the following question of law arising out of its order dated February 13, 1986, in respect of the assessment year 1982-83 u/s 256(1) of the Income Tax Act, 1961 :

"Whether, on the facts and in the circumstances of the case, the Income Tax Appellate Tribunal was justified in law in holding that the interest of Rs. 30,000 paid in Sarsoon Trading account to Anil Kumar Ajay Kumar, Alwar, was disallowable u/s 40(b) of the Income Tax Act, 1961 ?"

The brief facts of the case are that the assessee is a partnership firm. During the course of assessment, the Income Tax Officer, B-Ward, Alwar, found that there is an account in the name of Anil Kumar Ajay Kumar to whom the assessee has paid a sum of Rs. 30,000 by way of interest. The interest paid to the partner was considered to be hit by the provisions of Section 40(b) of the Income Tax Act. The said amount was held to be not admissible and was added. In the appeal preferred to the Appellate Assistant Commissioner, it was found that there have been several transactions between the assessee-firm and the proprietorship concern of Shri Ajay Kumar and 6h the outstanding balance, an interest of Rs. 30,000 has been paid. The submission of the assessee was that the business of Anil Kumar Ajay Kumar is separate and the interest paid to them cannot be considered to be interest paid to the partners. The Appellate Assistant Commissioner came to the conclusion that it is a case of payment of interest to a partner and, therefore, the provisions of Section 40(b) would be attracted. Against this order, a second appeal was preferred to the Income Tax Appellate Tribunal and, vide order dated February 13, 1986, the order of the Appellate Assistant Commissioner was upheld.

The provisions of Section 40(b) are as under :

"40. Amounts not deductible,--Notwithstanding anything to the contrary in Sections 30 to 38 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. "

From a perusal of the above provision, it is evident that the payment of interest to the partner is not deductible while computing the income chargeable under the head "Profits and gains of business or profession". The interest to the partner could be paid directly in respect of capital contributed or any sum received by the firm or it could indirectly be where the goods have been purchased from the partner. In both the situations, the provisions of Section 40(b) could be attracted. The capital which is being contributed and on which the interest is paid does not stand on a different footing than any amount which is lying to the credit of the partners in the books of the firm. The payment of the interest may be on the capital contributed or any other sum brought by the partner in the firm or available with the firm on which the interest is paid. Simply because supplies have been made by a partner the payment of interest on such outstanding amount would not take a different character.

The Karnataka High Court, in the case of Mysore Bangle Works v. CIT, (1986) 157 ITR 411 (KAR) while considering the commission paid by the firm to the partners in the capacity of the partners of the firm, held that the said amount is to be disallowed in view of the provisions of Section 40(b). In view of the specific provisions of the Act we are of the view that it will not make any difference with regard to disallowance of interest paid to the partner, if the same is paid on the amount which is credited in the books by way of capital or otherwise. The amount of interest which has been paid to the partner is not disputed as the said proprietary concern was owned by the partner and, therefore, any payment of interest would amount to payment of interest to the partner which is specifically disallowable under the provisions of the Act.

In these circumstances, we are of the opinion that the Income Tax Appellate Tribunal was justified in coming to the conclusion that the interest of Rs. 30,000 paid in Sarsoon Trading account to Anil Kumar Ajay Kumar, Alwar, was disallowable u/s 40(b) of the Income Tax Act, 1961.

Consequently, the reference is answered in favour of the Revenue and against the assessee.