Amit Textiles Vs. First Income-tax Officer - Court Judgment

Excerpt:
1. the first four appeals are by the assessee and the last two by the department. the appeal for the year 1977-78 is directed against the order of the commissioner under section 263 of the income-tax act, 1961 ('the act') and the appeals for other years relate to section 143 of the act. the common ground in dispute in all these appeals relate to the inclusion of interest paid to hufs of mansukhlal dwarkadas and himatlal dwarkadas in the total income of the assessee.2. for the assessment year 1977-78, there were three partners in the firm out of which the above two persons represented their respective hufs, and the third was an individual partner. the individual resigned from the firm and for the assessment years 1978-79 to 1980-81, the two individuals representing the hufs, continued to.....

Judgment:
1. The first four appeals are by the assessee and the last two by the department. The appeal for the year 1977-78 is directed against the order of the Commissioner under Section 263 of the Income-tax Act, 1961 ('the Act') and the appeals for other years relate to Section 143 of the Act. The common ground in dispute in all these appeals relate to the inclusion of interest paid to HUFs of Mansukhlal Dwarkadas and Himatlal Dwarkadas in the total income of the assessee.

2. For the assessment year 1977-78, there were three partners in the firm out of which the above two persons represented their respective HUFs, and the third was an individual partner. The individual resigned from the firm and for the assessment years 1978-79 to 1980-81, the two individuals representing the HUFs, continued to be partners. For all the years, there was no capital account in the name of the individuals Mansukhlal Dwarkadas and Himatlal Dwarkadas. There were accounts in the name of the HUFs of Mansukhlal Dwarkadas and Himatlal Dwarkadas.

Interest was being paid and credited to these accounts. It is this amount of interest which the ITO and the Commissioner in their orders under Section 263 wanted to add to the total income of the assessee-firm under Section 40(b) of the Act. The first appellate authority for the assessment years 1978-79 and 1979-80 upheld the department's order. For the assessment year 1977-78, the Commissioner directed the addition under Section 263. For the assessment year 1980-81, however, the first appellate authority decided the matter in favour of the assessee.

3. We have heard the parties. On behalf of the assessee, it is pointed out that the account is clearly that of the HUF and interest is paid to that account. We were also taken through the entries in this account.

Referring to two Special Bench decisions of the Delhi Benches of the Tribunal dated 23-9-1976 and 24-5-1978 and also the decision of the Supreme Court in the case of CIT v. Bagyalakshmi & Co. [1965] 55 ITR 660, the learned Counsel for the assessee has claimed that the interest cannot be included in the firm's income under Section 40(b). The entire amount belonged to the HUF, who in law cannot be a partner in the firm.

There was no question, thus, of the inclusion of the interest.

4. For the department, it is pointed that there was only one account to which profit and interest were credited by the assessee-firm.

Admittedly, this is the partners' account, whether it be called the HUF account or the individual account. By merely designating an account as belonging to the HUF the individual partner cannot get rid of his obligation.

5. The two Tribunal decisions cited above broadly support the assessee's case. We, however, find that there are two important facts more than the above which support his case. In our view, while every partnership firm does usually maintain an account for a partner, it is not necessary that a capital account of the partner appearing in the book is a sine qua non for the validity or the continuance of a partnership. There could be a positive capital account for a partner, there could be a negative capital account; certainly in between there could be a case of no capital account either. The mere fact, therefore, that there is no capital account separately in the name of the individual partner, does not mean that whatever exists to which profit is credited should be treated as the account of the individual partner.

In fact, we do not see any difficulty in a partner as soon as the profit accrues to him at the end of the year instead of taking credit for it in a personal capital account straightaway handing it over to someone else including a stranger, certainly in that case there could be an account in the name of the stranger. The firm might be paying interest to that account. Merely because the original of this account was a transfer by the partner of his own fund, profit or otherwise, the interest paid to this account cannot be treated as interest paid to that partner. There could be no difference in the situation if instead of the stranger, the account is that of a HUF. What we want to mention is even if the original of the amount could be traced to the profit credited to the individual partner and arising to him if these amounts are credited to the HUF's account, the HUF alone is the owner of the amounts. The interest paid on these amounts would, therefore, pertain only to the HUF who in law and admittedly cannot be a partner in a firm.

6. Secondly, from the nature of the account as obtaining certainly, it cannot be said that the individual partner could lay claim to the interest or the amount standing in the name of the HUF. He cannot file a suit or take action for dissolution of the firm in order to appropriate for himself, as an individual, the interest credited to the HUF's account. It would be as ridiculous for him to make such a claim in respect of an account of a stranger as in respect of his own HUF. It is not the case of the department that the HUF's account is as a matter of fact a benami account for the individual partner. Even if as subtly indicated by the learned Counsel for the department, this were to be thought of, the onus is on the department to prove that the account is a benami one. This onus not having been discharged, the account standing in the name of the HUF must be regarded both as a matter of fact and in law as belonging to the HUF only. It has nothing to do with the individual partner. The learned Counsel for the department pointed put that making such an entry would be an easy way of getting out of Section 40(b). We de not think so, because there is nothing in income-tax law or accountancy which forbids a partner from immediately transferring whatever profits accrue to him to any other person, related or unrelated, a HUF or a stranger. The interest credited cannot be included under Section 40(b) in the total income of the assessee-firm.

7. The assessee's appeals are allowed. The departmental appeals are dismissed.