COMMISSIONER OF INCOME TAX ANDHRA PRADESH Vs. K KRISHNAIAH CHETTY AND SONS

JUDGEMENT

(1.) The question referred for the decision of this court is :

(2.) The assessee, a registered firm of three partners sharing profits and losses equally, claimed deduction of interest under s. 40(b) of the I.T. Act, 1961, on the ground that the interest was paid not to any partner of the firm but to the respective HUFs of which the three partners were the members. The accounts of the firm showed that initially the amount of capital was credited in the names of the individual partners but the account relevant for the assessment years in question showed the capital of the firm credited in the name of the HUFs and the interest was also accordingly credited to these accounts. As the accounts stand, there can be no doubt that the capital was not contributed by the partners but was contributed by the HUFs and, consequently, the interest also was rightly debited to them. What was, however, contended by the I.T. authorities was that the initial credit was in favour of the individual partners and later this was transferred to the accounts of the HUFs. Consequently, this transfer musts be treated as a ruse adopted by the assessee to claim the benefit under s. 40(b) of the Act. That contention found favour with the ITO (sic) and AAC, and the claim was rejected. But on appeal by the assessee the Appellate Tribunal held that two important factors were overlooked, viz., (1) that the partners were not required to contribute capital, and (2) that the credit entry in the names of the HUFs was made consequent upon a partial partition with effect from 4/11/1970, which was accepted by the ITO himself. When the partners were not obliged to contribute any capital, any interest paid on such capital cannot be treated as interest paid to the partners. Merely because at one stage the amount of capital now standing transferred to the HUFs was shown in the accounts as capital of those partners for the previous year that cannot be a ground for ignoring the partial partition recognised by the ITO and ignoring the entries in the account relevant for the present assessment year. That is what the Appellate Tribunal has held and on the facts the Appellate Tribunal had found that the interest was paid to the HUF and not to the individual partners of the firm. That being the finding of fact which the Appellate Tribunal could reach on the material before it, the answer to the question musts necessarily be given in favour of the assessee. The facts of this case are more akin to the facts in Addl. CIT v. Vallamkonda Chinna Balaiah Chetty and Co. [1977] 106 ITR 556 (AP) and not similar to the facts of the cases referred for those decision of this court in CIT v. T. Veeraiah & K. Narasimhulu [1977] 106 ITR 283 (AP) and Addl. CIT v. K. G. Narayanaiah Chetty & Co. [1977] 106 ITR 420 (AP). In Addl. CIT v. Chinna Balaiah Chetty & Co. [1977] 106 ITR 556 (AP), a Bench of this court held a similar question referred to it in favour of the assessee.

(3.) For the foregoing reasons, the question referred to us is answered in the negatives and in favour of the assessee. No costs.