S.K.SEN, J. - (1.) WE have heard Sri Prakash Krishna, learned counsel for the Revenue, and Sri V.K. Rastogi, learned counsel for the respondents.
(2.) BRIEF facts of the reference which relate to asst. yrs. 1969 70 and 1970 71, inter alia, are that M/s Bhagwati Prasad Ram Sarup was an HUF, which was assessed as such for and up to the asst. yr. 1952 53. There was a partition in the joint family on 9th Nov., 1950, and a firm was formed with effect from the asst. year 1952 53. The firm has been assessed to tax from the said assessment year upto date. S/Sri Ram Sarup and Ram Prasad, who were real brothers, were the two partners of the firm having equal shares in the firm as constituted, on the partition of the family. Both S/Shri Ram Prasad and Ram Sarup were assessed to income tax for their asst. year 1956 57. For and up to the asst. year 1968 69 they were assessed as individuals and with effect from the year 1969 70 they were assessed as an HUF. However, the income on which they were assessed arose out of the assets, which were received, on the partition of the joint family and the assessments for all the years should have been made in the assessments of HUF. In connection with the asst. yr. 1964 65 the ITO received information that the partners had accounts in banks, which were not incorporated in the books of the firm. So far as Shri Ram Prasad is concerned he came up with the disclosure petition dt. 9th Aug., 1965, disclosing an income of Rs. 76,062, which had escaped assessment and requested that the same be assessed for asst. yrs. 1956 57 to 1964 65. As per that disclosure he had Rs. 43,919.99 at the end of the financial year 1953 54 which was outside the account books of the firm. Shri Ram Sarup did not make any disclosure petition. In this case, it was found that there were deposits in the bank in 1954 to the extent of Rs. 34,200 as under : Thereafter he was found to have made further deposits of Rs. 20,000 and Rs. 10,000 in the subsequent years. The assessments of S/Shri Ram Prasad and Ram Sarup were reopened for the asst. yrs. 1956 57 to 1963 64 under S. 147 to assess the disclosed income represented by the bank deposits and interest thereon. The position of unexplained investments surrendered for assessment in the case of Ram Prasad was that Rs. 31,000 were surrendered in the asst. year 1956 57 and Rs. 8000 in the asst. year 1960 61, total Rs. 39,000. The position in the case of Ram Sarup was that he surrendered Rs. 10,000 in 1963 64 and Rs. 20,000 in the asst. year 1964 65 total Rs. 30,000. Rs. 14 7 1954 10,200 29 12 1954 12,000 29 12 1954 12,000 34,200 In the accounts for the previous year relevant to the asst. year 1966 67 and subsequent years they opened another account in the books of the firm, in addition to their original account. They treated their original account as their capital account (in which only the profit was credited) and the accounts subsequently opened were treated as loan accounts (in which interest was charged from the firm). However, the entire income by way of profit and interest from the firm was assessed in the hands of the two partners. Shri Ram Prasad in his disclosure petition dt. 9th Aug., 1965, stated that he was a partner in the firm M/s Bhagwati Prasad Ram Sarup and that at the time of his marriage he had received substantial amounts from far and near relations in the shape of silver coins, which were kept with his wife and later on sold for Rs. 40,000, He stated that he believed that this Rs. 40,000 was his wife's exclusive property. He further stated that with this amount he purchased and sold Bidis and the money earned from Bidi business was kept with his wife. He added that although he had a bona fide belief that this money was his wife's exclusive property but since he had no evidence to prove his claim, he was offering a sum of Rs. 76,062 for assessment. This amount was offered for assessment in his own assessments in which the income from the firm (which was undoubtedly the joint family income) was being assessed. This income was offered for being assessed as joint family income. Similarly, Shri Ram Prasad surrendered the deposits for assessment along with his share income from the firm, which was the income of the joint family. Both the partners also got the interest on these bank deposits assessed along with the income of the joint family. In fact, Shri Ram Swarup in his letter dt. 16th Jan., 1965 (filed during the course of the assessment for 1964 65), had stated that the money deposited in the banks represented the savings of his family. Each of the two accounts of both the partners in the books of the firm M/s Bhagwati Prasad Ram Swarup were in their own names. For the asst. year 1970 71, it was claimed that they were , partners in the firm representing their respective HUFs. This contention of the assessee was accepted by the ITO. The assesseee further claimed that the partners had two accounts, one in the name of HUF and the other in the name of individuals, and that the interest paid to the two partners on their individual accounts could not be disallowed while computing the income of the firm. The ITO noticed that the assessee paid interest to the two partners for the first time in the asst. year 1970 71 amounting to Rs. 4,567 in the account of the partner Shri Ram Sarup and Rs. 8,123 in the account of the partner Shri Ram Prasad. The ITO further noticed that the two partners showed all the assets as usual in their wealth tax returns for the asst. year 1969 70 and that it was for the first time in the asst. year 1970 71 that an attempt was made to describe a part of the investment in the firm as individual. Considering the past history of the assessee and the fact that the two partners were showing these assets in the wealth tax returns and also the fact that no distinction was drawn at any time to indicate that one account represented the account of an individual and the other account that of a joint family, the ITO rejected the assessee's claim. The ITO further held that interest paid to the two partners had to be added back under cl. (b) of s. 40 of the IT Act. 1961, while computing the income of the firm. In appeal before the AAC, the AAC rejected the claim on the ground that simply because the assessments of the partners were made for some time in the status of individuals, the assessee could not claim that interest was their individual income. On further appeal before the Tribunal, the assessee took the stand that these two partners were carrying on some individual business and that they made disclosure petitions, which were not accepted, and the nature and source of the deposits made by them were also not explained. Accepting the above contention of the assessee, the Tribunal observed that this showed that they were having some other undisclosed sources of income, but that certainly it was not from the firm; that there could be no presumption that in a joint Hindu family the business carried on by a coparcener belonged to the family and that the coparceners could carry on their individual business as well. The Tribunal further observed that there could be no presumption that the other business, which these persons were carrying on, also belonged to the family. The Tribunal further observed that it was from the asst. year 1966 67 that these two partners opened their individual account in the books of the firm and interest was being paid on that account; that in the asst. year 1968 69, though interest was not paid, but that it did not mean that interest was not payable on those accounts. Observing that a Karta is a separate entity while the individual is distinct from it, the Tribunal held that keeping in view the two capacities the payment of interest on the individual account could not be disallowed. The Tribunal, therefore, held that the amount of interest paid in the individual accounts of the two partners, i.e. Rs. 4,567 to Shri Ram Swarup and Rs. 8,123 to Shri Ram Prasad were allowable deductions. In the appeals filed by Shri Ram Swarup HUF for the asst. year 1970 71 and by Shri Ram Prasad HUF for the asst. yrs. 1969 70 and 1970 71 the Tribunal held that the interest income could not be included in the assessments of their respective HUFs.
(3.) REVENUE , being aggrieved, moved reference application before the Tribunal, which was not allowed. Thereafter, being aggrieved, reference application was moved in this Court, whereupon following questions of law were framed : 1. Whether, on the facts and in the circumstances of the case, the Tribunal was legally justified in holding that the interest paid to the assessee was not includible in the hands of the firm under s. 40(b) of the IT Act, 1961? 2. Whether on the facts and in the circumstances of the case there was material before the Tribunal to hold that the two partners were carrying on some individual business and having some other undisclosed sources of income? ;