S GOPAL REDDY Vs. COMMISSIONER OF INCOME TAX

JUDGEMENT

(1.) At the instance of the assessee, the Income-tax Appellate Tribunal made this reference under section 256(1) of the Income-tax Act, 1961 (hereinafter referred to as "the Act"). The question referred relates to the income-tax assessment year 1977-78 and is extracted below :

(2.) The assessee and his three minor sons constituted a Hindu joint family. The family held the shares in two partnership firms known as "Rami Reddy & Co." and "Sri Laxmi Prasanna Sugar Factory". On behalf of the family, the karta held the shares in the partnership firms in a representative character. The total investment of the joint family in the two partnership concerns was Rs. 2,25,558 as on 31/08/1974. There was a partition of the joint family assets on Augu 31/08/1974, between the assessee and his three minor sons. The partnership interest in the two firms was divided among the karta and his three minor sons in equal shares in the course of such partition. It is not clear but it does appear that in the books of the joint family, entries were recorded in support of the division of the partnership interest as on 31/08/1974. It would, however, appear that corresponding entries were not made in the books of the partnership firms with the result that so far as the partnership firms were concerned, the investment still stood in the name of the karta of the family without a formal division among the karta and his three minor sons. It is stated that the division was not made in the partnership books on account of certain practical difficulties. It is claimed that there was an understanding between the karta of the family and his three minor sons that the capital which fell to the share of the three minor sons in the course of the partition on 31/08/1974, should be allowed to stand in the name of the karta in the books of the two partnership firms. In consideration of the above understanding, it appears, the karta agreed to pay to the three minor sons the share of the income corresponding to their 1/4th share and also interest. There is nothing on record to show how the understanding was arrived at between the karta and his three minor sons. The Revenue, however, did not dispute that such an understanding existed. In connection with the income-tax assessment year 1976-77, the assessee claimed deduction of Rs. 17,635 by way of interest payable to the three minor sons in respect of the share of the capital belonging to them which stood invested in the partnership firms. While completing the assessment, the Income-tax Officer restricted the deduction of interest from out of the assessees share income to the extent of only Rs. 7,602 on the ground that the assessee had received only that amount of interest from the two partnership firms. The claim for deduction of the balance amount was rejected. It appears that the assessee did not appeal against the disallowance of the balance amount.

(3.) For the assessment year 1977-78 which is under consideration, the previous year ended on 31/08/1976. The assessee claimed deduction of Rs. 16,834 as interest payable to his three minor sons. The Income-tax Officer declined to allow any portion of the claim on the ground that the assessee did not receive any interest at all from the two partnership firms and, therefore, there was no question of allowing the deduction in the hands of the assessee either under section 67(3) or under section 36(1)(iii) of the Act.