Satish Chandra, J. - (1.) M/s. Radhey Shyam Shri Krishna was a registered firm. It consisted of Sheo Kant and his two sons, Radhey Shyam and Shri Krishna, as the three partners. Sheo Kant died on October 11, 1967, leaving as his heirs his two sons and his widow. The firm was reconstituted by execution a fresh partnership deed on November 1, 1967. In this firm, the two sons and the widow became partners. For the assessment year 1969-70, the firm claimed a deduction of Rs. 6,226 on the ground that it paid this amount as interest to each of the two male partners. Likewise, a sum of Rs. 6,648 was claimed in respect of the assessment year 1970-71.
(2.) IT is not disputed that the firm paid the interest in dispute on the investment brought in by the two partners, Radhey and Shri Krishna, and the payment of interest was made by crediting their accounts. The ITO rejected the claim for deduction. He held that after the death of the father, the sons got the share of the capital in their individual capacity and that, therefore, the payment was, in substance, to the partners of the firm which was prohibited. On appeal, the AAC took a different view. He held that, in law, the money inherited by the two sons Radhey Shyam and Shri Krishna, was ancestral property in their hands qua their own sons and that, therefore, the money inherited by the two sons belonged to their HUF in law. The interest paid on the amount which belonged to the HUF was allowable because it could not be said that the interest was paid to the partners because the partners were individuals and not the HUF through their karta. At this stage, it may be stated that initially the amount of capital inherited by the two sons was entered in the books of the firm in their individual capacity. Subsequently it was transferred to the account of their respective HUFs in the books of the firm. The AAC held that this reversal or adjustment entry was done correctly in view of the true legal position. He, therefore, allowed the appeal pro tanto.
(3.) THE ITO went up to the Tribunal. THE Tribunal held that the money inherited by the two sons remained their individual property. THEir own sons had no interest in it. THEy, therefore, invested their own moneys as capital in the reconstituted firm. THE reversal entry was held to be an after-thought. On this view, which, in substance, amounted to saying that the payment of interest was, in truth, to the partner, the appeal was allowed and the ITO's order was upheld. At the instance of the assessee, the Tribunal has referred the following question of law for our opinion : "Whether, on the facts and in the circumstances of the case, the capital received by the sons of Shri Sheo Kant Misra on partition after his death constituted their individual property and the subsequent reversing of the entries made in the books on April 4, 1968, was an after-thought and the payment of interest on these capital accounts was not a permissible deduction ?" We are unable to uphold the view of the Tribunal that the money inherited by the two sons from their father was their self-acquired or individual property. In law, it was ancestral property in their hands qua their sons. The position is made clear by para. 223 of Mulla's Hindu Law. The Tribunal has referred to a footnote, which says: "Where a number of sons inherit their father's self-acquired property, they hold it as a joint family property. But now see section 19(b) of the Hindu Succession Act, 1956." Section 19(b) does not change the basic principle that the nature of ancestral property remains the same to the heir who inherits it from his father provided he has sons. Section 19(b) lays down the mode of succession whether it will be per capita or per stirpes. It says that if two or more heirs succeed together to the property of an intestate, they shall take the property, (a) save as otherwise expressly provided in this Act, per capita and not per stirpes ; and (b) as tenants-in-common and not as joint tenants. The Tribunal laid emphasis on the fact that they had taken the property as tenants-in-common. This only means that the coparcenary nature of the family is abolished. They took as joint tenants because they were treated as members of the Hindu coparcenary. Under the Hindu Succession Act, they have to take their individual interests as ascertained at the moment of inheritance. But this mode of succession does not touch the true nature of the inheritance by the sons. The nature of the property in their hands continues to be ancestral qua their own offsprings. Therefore, in law, the correct position was that the amount inherited by the two sons was ancestral in their hands qua their sons. In other words, the amounts belonged in law to the respective HUFs headed by each of the two sons Radhey Shyam and Shri Krishna. In this view, the making of the reversal entry was quite justified because obviously the two sons wanted the true legal position to be reflected in the books of account. ;