- (1.) Under Section 256(1) of the Income-tax Art, 1 961, the Tribunal has stated the following question for our opinion : "Whether the Tribunal was in law justified in maintaining the order of the Appellate Assistant Commissioner deleting the addition of Rs. 14,088 being interest paid on the credit balance in individual accounts of the partners ?" The assessee is a registered firm. For the assessment year 1974-75, there were three partners representing their respective Hindu undivided families. Certain amounts were paid to these partners by way of interest and those amounts were claimed by way of deduction. This was disallowed by the Income-tax Officer relying upon Clause (b) of Section 40 of the Act. On appeal, however, the Appellate Assistant Commissioner allowed the deduction and this was affirmed on appeal by the Tribunal.
(2.) So far as it is relevant, Section 40 (b) reads as follows : "Notwithstanding anything to the contrary in sections 30 to 38, the following amounts shall not he 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."
(3.) It was held by a Full Bench of this court in CIT v. Nitro Phosphetic Fertilizer [1988] 174 1TR 269 that the object of the provision is to prevent partners siphoning off substantial profits in the guise of salary, interest, bonus, commission, etc., and that the idea is to bring the entirety of such profits of the firm to charge. It is held that even where the karta of the Hindu undivided family joins the firm as a representative of the Hindu undivided family, he is not a distinct and separate personality from that of the Hindu undivided family and, therefore, monies invested by him from his individual account cannot be treated as distinct and separate for purposes of Section 40(b). It was held that such payments are liable to be disallowed. Following the said decision, we answer the question referred herein in the negative, i.e., against the assessee and in favour of the Department. There shall be no order as to costs.;