- (1.) THREE joint Hindu families through their kartas were partners of Tej Cloth Weaving Factory, the assessee. On March 31, 1979, there was a partial partition of all the three joint Hindu families and the capital standing to their credit in the assessee-firm was partitioned and was transferred to the coparceners. The coparceners allowed the amount to remain with the assessee-firm. The amount was treated as loan from each of the members, according to their share, by the assessee-firm and it paid total interest amounting to Rs. 23,442 in the accounting year 1979-80, and in the assessment year 1980-81 claimed deduction of the aforesaid amount, under Section 36 (1) (iii) of the Income-tax Act, 1961 (for short "the Act" ).
(2.) THE Income-tax Officer did not allow the deductions, as, in view of Section 171 (9) of the Act, partial partition made after December 31, 1978, had to be ignored and the interest paid was considered as having been paid to the partners either in their individual capacity or in the capacity of karta of the Hindu undivided family, which had to be disallowed by virtue of Section 40 (b) of the Act. However, on appeal, the Commissioner of Income-tax (Appeals) held the partial partition of the Hindu undivided families to be invalid as it was made after December 31, 1978, but concluded that the assessment of the income received from the assessee-firm would be assessed in the hands of the Hindu undivided family and not in the hands of the members of the Hindu undivided families. So far as the assessment of the assessee-firm is concerned, it was held that the provision of Section 171 (9) of the Act would not apply, nor would it place any restriction on the allowance of interest paid to the various members of the Hindu undivided families on partial partition as they became the creditors of the assessee-firm and the provisions of Section 36 (1) (iii) of the Act would apply. Accordingly, relief was allowed to the assessee-firm.
(3.) THE aforesaid appellate order was upheld by the Income-tax Appellate Tribunal, Amritsar, and at the instance of the Revenue, the following question has been referred for the opinion of this court: "whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal is right in law in upholding the finding of the Commissioner of Income-tax (Appeals) to the effect that interest payable to various members of the Hindu undivided families after partial partition, with effect from March 31, 1979, which is not valid as per Section 171 (9) of the Income-tax Act is an admissible deduction in computing the income of the assessee-firm ?";