- (1.) THIS reference under section 256(1) of the Income -tax Act, 1961, is at the instance of the Revenue, to answer the following question of law : 'Whether, on the facts and in the circumstances of the case, the Tribunal was justified in deleting the disallowance of interest of Rs. 2,125 made under section 40(b) of the Income -tax Act, 1961 ?'
(2.) THE relevant assessment year is 1978 -79. One Kishanlal was a partner in his individual capacity in the assessee firm, Kishanlal and Bros., Kota. There were two accounts in the assessee -firm, one for the said Kishanlal as a partner in his individual capacity and the other for the Hindu undivided family represented by Kishanlal in his representative capacity. Interest was paid by the assessee -firm during the relevant period to both these accounts. We are here concerned with the disallowance of interest under section 40(b), which was paid to the Hindu undivided family represented by Kishanlal and not with the amount of interest which was paid to Kishanlal as an individual, in which capacity alone he was a partner in the assessee -firm. The Tribunal has held that the interest paid to the Hindu undivided family represented by Kishanlal as a karta is not hit by the prohibition contained in section 40(b) of the Act, inasmuch as Kishanlal was a partner in the assessee -firm only in his individual capacity and not in his representative capacity as karta of the Hindu undivided family. Aggrieved by this view taken by the Tribunal, the Revenue has come up by reference under section 256(1) of the Act to this court. In our opinion, the point involved for decision in the above question is concluded by the decision in D.B. Income -tax References Nos. 1 and 2 of 1982 decided on May 6, 1988 (Gajanand Poonam Chand and Bros. v. CIT ). That was a case in which the same question arose in the context of interest paid to the person as an individual in his separate account when the same individual in his representative capacity alone as karta of the Hindu undivided family was a partner in the assessee -firm. It was held that Explanations 2 and 3, which cover both the situations, are clarificatory of the law as it existed prior to their insertion by the Taxation Laws (Amendment) Act, 1984, with effect from April 1, 1985, and that the prohibition contained in section 40(b) even without the aid of these Explanations is attracted only to a situation where payment of interest is in the very same capacity in which the person is a partner in the assessee -firm. Following that decision, it must be held in the present case that the payment of interest to the Hindu undivided family represented by Kishanlal as its karta was not payment of that amount to a partner of the firm since Kishanlal was a partner of the assessee -firm only in his individual capacity and not also in his representative capacity as karta of the Hindu undivided family. The view taken by the Tribunal, being in consonance with this view, has to be upheld.
(3.) CONSEQUENTLY the reference is answered in the affirmative, against the Revenue and in favour of the assessee by holding that the Tribunals view is justified. No costs.;