- (1.) THIS is a reference under Section 256(1) of the Income-tax Act, 1961, at the instance of the Revenue, to answer the following question of law, namely : "Whether, on the facts and in the circumstances of the case, the Tribunal was legally justified in holding that interest payments on the loans advanced by Tarachand and Rameshwardas representing their respective Hindu undivided families out of the Hindu undivided family funds were not inadmissible under Section 40(b) of the Income-tax Act, 1961 ?"
(2.) THE relevant assessment year is 1979-80. THE partners in the assessee-firm were representing their Hindu undivided families in the capacity of karta. THE Hindu undivided families had advanced loans to the firm and the interest on those loans were paid by the firm for the benefit of the Hindu undivided families. THE question was whether the amount of interest so paid by the firm could be deducted while computing the income in view of Section 40(b) of the Act. THE Income-tax Officer disallowed the deduction taking the view that the prohibition contained in Section 40(b) of the Act is attracted. THE Appellate Assistant Commissioner reversed that view and the Tribunal has concurred with the view of the Appellate Assistant Commissioner. Hence, this reference at the instance of the Revenue. The point involved for decision was considered at length by a Division Bench, of which one of us (J. S. Verma C. J.) was a member, in D. B. Income-tax References Nos. 1 of 1982 and 2 of 1982 decided on May 6, 1988, Gajanand Poonam Chand and Brothers v. CIT [1988] 174 ITR 346 (Raj), It was held therein that the Explanations inserted in Clause (b) are merely declaratory. It was further held that where interest was paid to the karta representing a Hindu undivided family and it was in the same capacity that he was a partner of the firm, the prohibition contained in Section 40(b) was attracted while the provision did not apply if the interest was received by the karta in a different capacity as an individual against the loan advanced by him as an individual distinct from the capacity as a partner of the firm. In the present case, the interest was received in the capacity as partner of the firm and not in a distinct capacity. The prohibition contained in Section 40(b) of the Act was, therefore, clearly attracted. The contrary view of the Tribunal is, therefore, not justified. Consequently, the reference is answered in favour of the Revenue and against the assessee by holding that the Tribunal's view in favour of the assessee is not justified. No costs.;