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M/S Gajanand Poonam Chand & Brothers, Bhadra v. C.I.T, Jodhpur(44)

Rajasthan High Court

May 6, 1988

Judgment

Subsequent
References

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Factual and Procedural Background

These consolidated references (Reference No. 1 of 1982 and Reference No. 2 of 1982) arise from assessment years 1974-75, 1978-79 and 1979-80 concerning the same assessee (the firm Gajanand Poonam Chand & Brothers). At the instance of the assessee the Income Tax Appellate Tribunal referred common questions of law to this Court under section 256(1) of the Income-tax Act, 1961.

Material facts (as stated in the opinion): one partner of the firm was Poonam Chand acting in his representative capacity as the karta of a Hindu undivided family (HUF). Separately, Poonam Chand in his individual capacity had an account with the firm. For the relevant assessment years the firm paid interest to Poonam Chand in respect of his distinct individual account (i.e., not in his capacity as karta/partner). The Income-tax Officer held that section 40(b) applied to such interest and disallowed it. The Commissioner of Income-tax (Appeals) dismissed the assessee's appeal and the Tribunal affirmed the disallowance; the Tribunal therefore referred the legal question(s) to this Court.

The opinion notes that the three explanatory provisions now in clause (b) of section 40 were inserted by the Taxation Laws (Amendment) Act, 1984, with effect from April 1, 1985, but the references concern years prior to that insertion and the Court considers s.40(b) as it stood before the Explanations were added.

Legal Issues Presented

Whether, on the facts and in the circumstances of the case, the Tribunal was right in sustaining the disallowance of Rs. 8,506 and Rs. 10,720 pertaining to the assessment years 1974-75 and 1978-79 respectively under section 40(b) of the Income-tax Act, 1961.
Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that interest paid to Shri Poonam Chand, who was a partner as karta of his Hindu undivided family in the assessee-firm, on his individual account by the assessee was hit by the provisions of section 40(b) of the Income-tax Act, 1961 (relating to assessment year 1979-80).

Arguments of the Parties

The opinion does not contain a detailed account of the parties' legal arguments.

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court
CIT v. T. Veeraiah and K. Narasimhulu [1977] 106 ITR 283 (AP)	Principle that the character in which the partner received the amount is relevant for s.40(b); payments to a partner in a character other than as partner could not be disallowed.	Placed among High Court decisions supporting the assessee's position that interest paid in an individual capacity is not caught by s.40(b).
Addl. CIT v. K. G. Narayaniah Chetty and Co. [1977] 106 ITR 420 (AP)	Similar principle as above: the character of receipt matters for application of s.40(b).	Cited as part of consistent Andhra Pradesh High Court authority favouring the assessee's view.
Addl. CIT v. Vallamkonda Chinna Balaiah Chetty and Co. [1977] 106 ITR 536 (AP)	Same principle: payments received in a capacity other than as partner are not to be treated as payments to a partner for s.40(b).	Relied on as supporting authority for construing s.40(b) in favour of the assessee.
Terla Veeriah v. CIT [1979] 120 ITR 502 (AP)	Reinforces that the character in which payment is received is relevant to s.40(b).	Included in the Andhra Pradesh decisions forming the consistent view relied upon by the Court.
N. T. R. Estate v. CIT [1986] 157 ITR 285 (AP)	Held that character of receipt is significant; interest paid to a partner in a character other than as partner could not be disallowed under s.40(b).	Specifically cited as a similar situation and relied on by the Court to support the assessee's position.
CIT v. Chitra Kalpana [1988] 169 ITR 678 (AP)	Affirmed that interest paid in a character other than as partner is not caught by s.40(b); treated Explanation 2 as clarificatory.	Cited as reinforcing Andhra Pradesh jurisprudence and the view that Explanation 2 merely declares existing law.
CIT v. Pannalal Hiralal and Co. [1984] 146 ITR 549 (Bombay)	Held that the character of receipt is relevant and payments not made as partner cannot be disallowed under s.40(b).	Adduced as supporting authority from the Bombay High Court aligned with the majority view.
Chhotalal and Co. v. CIT [1984] 150 ITR 276 (Gujarat Full Bench)	Held the character of payment is decisive; payments not in representative capacity are not to be taken into account under s.40(b).	Followed by other High Courts and cited as part of the consistent majority view.
Venkatesh Emporium v. CIT [1982] 137 ITR 593 (Madras)	Principle that an individual has a distinct legal personality from his personality as karta of an HUF, and thus interest not paid to him as partner cannot be disallowed under s.40(b).	Used to support the conclusion that the distinct individual account should not be hit by s.40(b).
CIT v. Colombo Stores [1984] 149 ITR 108 (Madras)	Followed Venkatesh Emporium: character of receipt controls applicability of s.40(b).	Cited as further Madras authority consistent with the assessee-favouring view.
CIT v. Narbharam Popatbhai and Sons [1987] 166 ITR 534 (Madhya Pradesh Full Bench)	Adopted the view that interest paid otherwise than as partner is not to be taken into account under s.40(b).	Counted among the High Court decisions supporting the majority position relied upon by the Court.
Chandmul Rajgarhia v. CIT [1987] 164 ITR 486 (Patna)	Contrary principle: denied the existence of two distinct personalities (individual and karta) for the purposes of s.40(b); held the prohibition under s.40(b) applies irrespective of the character of receipt.	Cited as a decision taking the opposite view; the Court noted this contradiction but preferred the majority view of other High Courts.
CIT v. Khoday Eswarsa and Sons [1985] 152 ITR 423 (Karnataka)	Held that s.40(b) prohibition is absolute and does not distinguish between payments made in different characters; no dichotomy in personality permitted.	Noted as supporting the contrary view; Court observed these decisions did not consider earlier authorities taking the opposite view.
Shri Ramanjaneya Textiles v. CIT [1986] 159 ITR 509 (Karnataka)	Same contrary principle: the capacity in which amount is received is immaterial for s.40(b).	Presented as further Karnataka authority for the contrary position; Court declined to follow this approach.
CIT v. London Machinery Co. [1979] 117 ITR 111 (Allahabad)	Held that the capacity in which payment is received (on behalf of family or for individual benefit) is immaterial; for s.40(b) there can be no dichotomy in personality.	Identified as the seminal Allahabad decision followed by later Allahabad cases; Court criticized its narrow reasoning and declined to follow it.
CIT v. Brijmohan Das Laxman Das [1979] 117 ITR 121 (Allahabad)	Part of the Allahabad line holding capacity immaterial for s.40(b).	Noted as part of the contrary Allahabad view which the Court declined to accept.
CIT v. Chandu Lal Surajpal [1986] 157 ITR 346 (Allahabad)	Continued the Allahabad approach that no dichotomy of personality exists for s.40(b).	Placed among Allahabad decisions whose reasoning the Court found unpersuasive.
CIT v. Hari Nath and Co. [1987] 168 ITR 440 (Allahabad)	Noted divergence in judicial opinion but the Division Bench followed Allahabad precedent that capacity is immaterial under s.40(b).	Cited to show the Allahabad line of decisions and to explain why the Court found those decisions less persuasive.
CIT v. Motilal Ramjiwan & Co. [1988] 171 ITR 294 (Raj)	Considered Explanation 1 inserted in clause (b) and held it to be clarificatory/declaratory of the existing law.	Referred to as a prior instance where this Court (in a different reference) treated an Explanation as clarificatory; used to support the view that Explanation 2 is declaratory of pre-existing law.

Court's Reasoning and Analysis

The Court's analysis proceeds in a sequence of legal and interpretive steps, summarized below strictly as articulated in the opinion:

Identification of the precise legal issue: whether interest paid by a firm to an individual partner (in his distinct individual capacity) is disallowable under section 40(b) merely because that individual, in a separate representative capacity (as karta of an HUF), is a partner of the firm.
Statutory starting point: the Court examined clause (b) of section 40 as it stood during the relevant assessment years (i.e., before Explanations 1–3 were inserted with effect from April 1, 1985). The Court reproduced the relevant parts of s.40(b) and noted the later insertion of explanatory provisions.
Effect of later Explanation 2: the Court observed that Explanation 2 (inserted in 1985) makes it clear that after that date interest paid to an individual otherwise than as a partner in a representative capacity is not to be taken into account for the purposes of the clause. The Court nevertheless analysed whether the Explanation is merely declaratory (clarificatory) of the law prior to 1985 or whether it introduced a substantive change.
Interpretation of statutory personhood: the Court referred to the inclusive definition of "person" in section 2(31) of the Act and emphasized that an "individual", an HUF and a "firm" are distinct persons under the Act. This supports recognition of distinct legal personalities for an individual acting in representative capacity (as karta) and as an individual.
Construction of s.40(b) prior to the Explanations: the Court found nothing in the language of clause (b) that requires obliteration of the distinction between an individual's different legal personalities. On that basis the Court concluded that clause (b) should not be construed so as to disallow payments made to a person in a character other than that of partner merely because the same person, in another capacity, is a partner.
Purpose of Explanation 2: after surveying authorities the Court held that Explanation 2 was inserted to remove doubt created by divergent High Court decisions and is therefore merely declaratory of pre-existing law rather than enacting a new exception to clause (b). The Court stated the ordinary purpose of an Explanation is clarification, not substantive enactment, and that this was the case here.
Survey of judicial authorities: the Court performed an extensive review of High Court decisions. It identified a majority line (Andhra Pradesh, Bombay, Gujarat Full Bench, Madras, Madhya Pradesh) holding that the character of receipt matters and that payments made to an individual otherwise than as partner are not caught by s.40(b). It contrasted these with decisions (Patna, Karnataka, Allahabad) that treated s.40(b) as absolute and the capacity of receipt as immaterial.
Evaluation of contrary authorities: the Court explained why it could not subscribe to the contrary (Allahabad/Karnataka/Patna) view. The Court found that the Allahabad decisions did not consider or discuss the reasoning of the other High Courts and that the majority view of several High Courts was more persuasive. The Court also invoked the interpretive principle that, where two constructions are possible, the one favourable to the assessee should be preferred.
Application to facts: applying the above interpretive conclusions to the facts of the case, the Court held that the interest paid to Poonam Chand in his individual account (distinct from his account as karta/partner) was not hit by the prohibition in section 40(b) as it stood for the relevant years.

Holding and Implications

HOLDING: The Court answered the questions referred in both references in favour of the assessee and against the Revenue. It concluded that the Tribunal was not justified in holding that the interest paid to Poonam Chand in his individual account (distinct from his account as karta of the HUF in which capacity alone he was partner of the firm) was disallowable under section 40(b) of the Income-tax Act, 1961.

Implications:

The direct effect is that the disallowance sustained by the Tribunal (in respect of the specified amounts for the assessment years) is reversed as to the interest paid to the individual account of Poonam Chand; the questions are answered for the assessee and against the Revenue.
The Court held that Explanation 2 (inserted in 1985) is declaratory of the existing law and was intended to settle divergent High Court views rather than to introduce a novel exception; thus the decision treats the pre-1985 statutory position as consistent with that clarificatory explanation.
The opinion acknowledges conflicting High Court authority but follows the majority view; the Court preferred the construction favourable to the assessee where alternative constructions were possible.
No costs were awarded (expressed in the opinion: "No costs.").

Show all summary ...

S. VERMA C.J. - This common order shall dispose of both the above references, which relate to the same assessee. Reference No. 1 of 1982 relates to the assessment years 1974-75 and 1978-79, while Reference No. 2 of 1982 relates to the assessment year 1979-80.

At the instance of the assessee the Tribunal has referred under section 256(1) of the Income-tax Act, 1961, a common question of law arising out of the Tribunals order in respect of the above assessment years, for the decision of this court.

The question of law as framed in Reference No. 1 of 1982 is as under :

"Whether, on the facts and in the circumstances of the case, the Tribunal was right in sustaining the disallowance of Rs. 8,506 and Rs. 10,720 pertaining to the assessment years 1974-75 and 1978-79, respectively, under section 40(b) of the Income-tax Act, 1961 ?"

The question of law as framed in Reference No. 2 of 1982 is as follows :

"Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that interest paid to Shri Poonam Chand, who was a partner as karta of his Hindu undivided family in the assessee-firm, on his individual account by the assessee was hit by the provisions of section 40(b) of the Income-tax Act, 1961 ?"

In substance, the question of law referred in both the references is the same and is based on the same set of facts.

One of the partners of the assessee-firm, Gajanand Poonam Chand & Brothers, is Poonam Chand in his representative capacity as the karta of his Hindu undivided family. Apart from this capacity of Poonam Chand representing the Hindu undivided family as its karta for the purpose of partnership of the firm, the said Poonam Chand in his individual capacity had a separate account with the firm. For the assessment years 1974-75, 1978-79 and 1979-80, the assessee-firm paid interest to Poonam Chand on his individual account distinct from his account as partner in his capacity as karta of his Hindu undivided family. A question arose whether section 40(b) of the Income-tax Act, 1961, applied to the interest so paid by the assessee-firm in the distinct individual account of Poonam Chand, due to the fact that Poonam Chand in a separate representative capacity as the karta of a Hindu undivided family is a partner of that firm. The Income-tax Officer took the view that section 40(b) of the Act is attracted. The assessees appeal to the Commissioner of Income-tax (Appeals) was dismissed. The Tribunal has affirmed that view on further appeal by the assessee. Hence, these references at the instance of the assessee in respect of the aforesaid assessment years.

It is admitted that the interest paid to Poonam Chand by the assessee-firm is in respect of his distinct account as an "individual" separate from the account of Poonam Chand as the karta of a Hindu undivided family, in which capacity alone he is a partner of the assessee-firm. The question, therefore, is whether in spite of this distinct and separate personality as an "individual" in which capacity alone the interest has been paid by the assessee-firm, the interest is to be disallowed merely because in a separate representative capacity the said Poonam Chand represents the Hindu undivided family as a partner in the firm ? There are conflicting decisions of several High Courts and there is no decision on this point either of this court or of the Supreme Court. It is, therefore, necessary for us to consider this question at some length.

The relevant part of section 40 of the Income-tax Act, 1961, is as under :

"40. Notwithstanding anything to the contrary in sections 30 to 39, the following amounts shall not be deducted in computing the income chargeable under the head Profits and gains of business or profession, - ...

(b) in the case of any firm, any payment of interest, salary, bonus, commission or remuneration made by the firm to any partner of the firm; ...

Explanation 1. - Where interest is paid by a firm to any partner of the firm who has also paid interest to the firm, the amount of interest to be disallowed under this clause shall be limited to the amount by which the payment of interest by the firm to the partner exceeds the payment of interest by the partner to the firm.

Explanation 2. - Where an individual is a partner in a firm on behalf, or for the benefit, of any other person (such partner and the other person being hereinafter referred to as partner in a representative capacity and person so represented respectively), -

(i) interest paid by the firm to such individual or by such individual to the firm otherwise than as partner in a representative capacity, shall not be taken into account for the purposes of this clause;

(ii) interest paid by the firm to such individual or by such individual to the firm as partner in a representative capacity and interest paid by the firm to the person so represented or by the person so represented to the firm, shall be taken into account for the purposes of this clause.

Explanation 3. - Where an individual is a partner in a firm other-wise than as partner in a representative capacity, interest paid by the firm to such individual shall not be taken into account for the purposes of this clause, if such interest is received by him on behalf, or for the benefit, of any other person."

The three Explanations in clause (b) of section 40 have been inserted by the Taxation Laws (Amendment) Act, 1984, with effect from April 1, 1985. We are here concerned with section 40(b) as it stood without these Explanations during the relevant assessment years.

A mere perusal of Explanation 2 inserted in section 40(b) with effect from April 1, 1985, clearly indicates that for the period subsequent to the insertion of the Explanation, there can be no ambiguity and interest paid by the firm to an individual otherwise than as a partner in a representative capacity does not attract the prohibition contained in section 40(b) of the Act. The real question, therefore, is whether the main enacting part in clause (b) as it stood prior to the insertion of this Explanation is required to be construed differently. In other words, is this Explanation merely clarificatory of the existing law contained in clause (b) prior to its insertion or is it by itself a distinct enacting provision in the nature or proviso carving out an exception from the general rule enacted in clause (b). We shall first consider without reference to this Explanation whether clause (b) should be construed as depriving the individual of the benefit merely because in a distinct representative capacity, he is a partner in the firm.

It would be useful to refer to the definition of "person" given in section 2(31) of the Act. This is an inclusive definition and it clearly shows that an "individual", a "Hindu undivided family" and a "firm" are to be treated as distinct persons or entities for the purposes of the Income-tax Act. In this scheme of things, it is obvious that under the provisions of the Income-tax Act, there is no inconsistency in treating an individual as a person distinct from the same individual representing the Hindu undivided family as its karta for the purposes of partnership in a firm. The question, therefore, is whether, in such a situation, for the purpose of section 40(b), the distinction between the two personalities of an individual, which is clearly recognised by the provisions of the Income-tax Act is to be treated as obliterated ? We do not find anything in section 40(b) requiring obliteration of the distinction between these two personalities of an individual in order to hold that merely because an individual is also in his representative capacity as karta of a Hindu undivided family, a partner of the assessee-firm, the interest paid to him in his distinct individual account must be disallowed under section 40(b).

It appears to us that the Legislature inserted Explanation 2 in section 40(b) with effect from April 1, 1985, to settle the controversy on account of divergence of opinion among the High Courts on this point, there being no authoritative pronouncement of the Supreme Court. In this view of the matter, we are inclined to hold that Explanation 2 is merely declaratory of the existing law as contained in clause (b) of section 40 intended to remove the doubt raised on account of conflicting High Court decisions; and it is not a new enacting provision carving out an exception from the general rule contained in clause (b). The ordinary purpose of an Explanation is to clarify that which is already enacted and not to enact something new. No doubt, the Explanation sometimes may be a distinct enacting provision itself. However, It would then not be performing its ordinary or normal function of an Explanation. We are of the view that the function of Explanation 2 inserted in clause (b) with effect from April 1, 1985, is its normal function of explaining that which is already contained in clause (b).

Incidentally, we may mention that we had an occasion to consider the nature of Explanation I inserted in clause (b) of section 40 at the same time with effect from April 1, 1985, in CIT v. Motilal Ramjiwan and Co. [1988] 171 ITR 294 (Raj) (D.B.I.T. Ref. No. 31/81 (Jodhpur), decided on September 2, 1987) and the view taken by us is that Explanation I was merely clarificatory or declaratory of the existing law already contained in clause (b) to remove ambiguity, if any, in its construction. We are inclined to take the same view also with regard to Explanation 2 as already stated.

Insertion of Explanation 2 along with Explanation 3 without any amendment being made simultaneously in clause (b) of section 40 or the definition of "person" in section 2(31) of the Act reinforces our conclusion that under the Income-tax Act, an individual representing the Hindu undivided family has a personality distinct from his capacity as a mere individual. It is with the different facets of personality of an individual under the Income-tax Act with which we are concerned.

We shall now refer to the decisions of several High Courts, which were cited at the Bar. The decisions of the Andhra Pradesh High Court are, CIT v. T. Veeraiah and K. Narasimhulu [1977] 106 ITR 283 (AP), Addl. CIT v. K. G. Narayaniah Chetty and Co. [1977] 106 ITR 420, Addl. CIT v. Vallamkonda Chinna Balaiah Chetty and Co. [1977] 106 ITR 536, Terla Veeriah v. CIT [1979] 120 ITR 502, N. T. R. Estate v. CIT [1986] 157 ITR 285 and CIT v. Chitra Kalpana [1988] 169 ITR 678. It has been expressly held in a similar situation in N. T. R. Estates case [1986] 157 ITR 285 and Chitra Kalpanas case [1988] 169 ITR 678, that the character in which the partner received the amount from the firm is relevant and significant for the purposes of determining whether the provisions of section 40(b) are applicable; and that interest paid to a partner in a character other than a partner could not be disallowed under section 40(b) of the Act. In both these decisions, the Andhra Pradesh High Court also referred to the newly added Explanation 2 in section 40(b) and expressed the view that the Explanation was merely clarificatory of the existing law and not a new enacting provision. The earlier decisions of the Andhra Pradesh High Court need no separate consideration. The same view has been taken by the Bombay High Court in CIT v. Pannalal Hiralal and Co. [1984] 146 ITR 549, and by a Full Bench of the Gujarat High Court in Chhotalal and Co. v. CIT [1984] 150 ITR 276, which has been referred by the Andhra Pradesh High Court in its later decisions. The Madras High Court also has taken the same view in Venkatesh Emporium v. CIT [1982] 137 ITR 593, on the basis of the principle that an individual has a distinct legal personality as an "individual" different from his personality as the karta of a Hindu undivided family and, therefore, unless interest is paid by the assessee-firm to him as a partner of the firm, the same cannot be disallowed under section 40(b) of the Act. It is also significant that while taking this view, a strong dissent was expressed against the contrary view taken by the Allahabad High Court, to which we shall refer later. This decision was followed by another Division Bench of the Madras High-Court in CIT v. Colombo Stores [1984] 149 ITR 108. We may here mention that some earlier decisions of the Andhra Pradesh High Court, Madras High Court and Gujarat High Court purporting to take a different view are no longer relevant in view of the latest consistent view of these High Courts already indicated by us. We are, therefore, not making any reference to these earlier decisions. A Full Bench of the Madhya Pradesh High Court in CIT v. Narbharam Popatbhai and Sons [1987] 166 ITR 534, has also taken the same view following the decisions we have already cited. There is thus a strong opinion of these several High Courts consistent with the view we have taken on the meaning of section 40(b) of the Act even without the aid of Explanation 2 inserted therein with effect from April 1, 1985.

We shall now refer to the decisions which have been cited in support of the contrary view. The Patna High Court in Chandmul Rajgarhia v. CIT [1987] 164 ITR 486, has taken the contrary view and dissented from the above-quoted Full Bench decision of the Gujarat High Court and some other High Courts taking that view. The basis of this decision appears to be the non-existence of two distinct personalities, one as an individual and the other as a karta of a Hindu undivided family, on the ground that section 40(b) does not contemplate this dichotomy.

The view of the Allahabad High Court in CIT v. London Machinery Co. [1979] 117 ITR 111, has been followed to which reference will be made by us later. The two decisions of the Karnataka High Court, which have been cited to support the contrary view are, CIT v. Khoday Eswarsa and Sons [1985] 152 ITR 423 and Shri Ramanjaneya Textiles v. CIT [1986] 159 ITR 509. The basis of this view is that the prohibition contained in section 40(b) is absolute and makes no distinction between the payments made by way of interest, etc., to a partner as a partner and such payments made to him in a different character. In other words, it has been assumed that no dichotomy in the personality of an individual is permissible under the Income-tax Act. We may also mention that in the Karnataka cases, there is no consideration of the earlier decisions of several High Courts taking the opposite view.

Now, the main cases which remain to be referred to are of the Allahabad High Court, which have also been relied on in some decisions of High Courts taking the contrary view. The Allahabad decisions are CIT v. London Machinery Co. [1979] 117 ITR 111, CIT v. Brijmohan Das Laxman Das [1979] 117 ITR 121, CIT v. Chandu Lal Surajpal [1986] 157 ITR 346 and CIT v. Hari Nath and Co. [1987] 168 ITR 440. The decision in CIT v. London Machinery Co. [1979] 117 ITR 111 (All) is the one which has been followed in the later decisions. The basis of this decision taking the contrary view is that the capacity in which a person receives the payment whether on behalf of the family or for his own individual benefit is immaterial. In other words, this view proceeds on the assumption that for the purpose of section 40(b), there can be no dichotomy in the personality of an individual. On this assumption, naturally, the conclusion is that the payment is to be treated as that made to the partner even when it is not to him in his representative capacity as a partner but in a distinct individual capacity. With respect, we are unable to subscribe to either the basis on which the contrary view proceeds or the ultimate conclusion reached on that basis.

The reason for our inability to concur with this contrary view has already been indicated by us. We also find that the decisions of other High Courts taking the other view are not considered and their reasoning has not been noticed in the Allahabad decisions. The divergence of judicial opinion on the point was noticed in CIT v. Hari Nath and Co. [1987] 168 ITR 440 (All), but the Division Bench preferred to follow the view taken by that Court in the earlier decisions declining to make a reference to a larger Bench as suggested and without considering the reasons on which the other view is based. It does not appear from this decision that both the learned judges constituting the Division Bench had reservations about the correctness of the earlier view which they were merely following as a binding precedent. In our opinion, the weight of the Allahabad view is considerably reduced by these factors also. However, with respect, we find ourselves unable to concur with this view also because the view we have taken is in consonance with the view taken by a majority of the High Courts. Moreover, if both views are possible, then the view in the assessees favour must be preferred while construing such an enactment.

As a result of the above discussion, we have come to the conclusion that the Tribunal was not justified in holding that the interest paid to Poonam Chand in his individual account distinct from the account of the Hindu undivided family, which he represented as karta and in which capacity alone he was partner of the assessee-firm, is hit by the prohibition contained in section 40(b) of the Income-tax Act, 1961. We answer the questions referred in both these references accordingly in favour of the assessee and against the Revenue.

No costs.