ORDER The Income Tax Appellate Tribunal, New Delhi has referred the following identical question of law for the assessment years 1978-79 and 197980 under section 256(1) of the Income Tax Act, 1961 (hereinafter referred to as 'the Act') for opinion to this court:
"Whether, on the facts and in the circumstances of the case, the Tribunal was legally correct in holding that the interest payments amounting to Rs. 14,400 were not hit by section 40(b) of the Income Tax Act, 1961?"
2. Briefly stated, the facts giving rise to the present writ petition are as follows :
2. Briefly stated, the facts giving rise to the present writ petition are as follows :
The respondent-assessee firm derived income from purchase and sale of the medicine. The Income Tax Officer found that the respodnent-assessee had paid interest to the following association of persons
1. M/s. Jagdish Chand Investors Corporation Rs. 7,200
2. M/s. Hukumchand Investors Corporation Rs. 7,200
3. The Income Tax Officer found that Sri Jagdish Chand and Sri Hukum Chand were partners in the firm having 45 per cent and 55 per cent shares respectively in the profits and that the interest paid in the name of association of persons was, in fact, interest paid to the partners themselves and, therefore, he disallowed this amount of interest under section 40(b) of the Act. In appeal, the Appellate Assistant Commissioner found that there were deposits of Rs. 40,000 each in the two accounts in the name of M/s. Jagdish Investors Corporation and M/s. Hukum Chand Investors Corporation and these were transferred to these accounts after debiting it to the partners accounts. He further found that these accounts were in respect of the association of persons consisting of Sarvsri Jagdish Chand, Hukum Chand and Lajpat Rai. The other one was the association of persons of Sri Jagdish Chand. The Appellate Assistant Commissioner held that this was nothing but interest paid to the partners and association of persons had no source of income or business activity and, thus, confirmed the disallowance. In appeal, the Tribunal found that the association of persons were doing business of investors and, financiers. It was contended that the interest was not paid to the partners but to the association of persons who were different entity. It was, therefore, held that the interest could not be disallowed under section 40(b) of the Act.
3. The Income Tax Officer found that Sri Jagdish Chand and Sri Hukum Chand were partners in the firm having 45 per cent and 55 per cent shares respectively in the profits and that the interest paid in the name of association of persons was, in fact, interest paid to the partners themselves and, therefore, he disallowed this amount of interest under section 40(b) of the Act. In appeal, the Appellate Assistant Commissioner found that there were deposits of Rs. 40,000 each in the two accounts in the name of M/s. Jagdish Investors Corporation and M/s. Hukum Chand Investors Corporation and these were transferred to these accounts after debiting it to the partners accounts. He further found that these accounts were in respect of the association of persons consisting of Sarvsri Jagdish Chand, Hukum Chand and Lajpat Rai. The other one was the association of persons of Sri Jagdish Chand. The Appellate Assistant Commissioner held that this was nothing but interest paid to the partners and association of persons had no source of income or business activity and, thus, confirmed the disallowance. In appeal, the Tribunal found that the association of persons were doing business of investors and, financiers. It was contended that the interest was not paid to the partners but to the association of persons who were different entity. It was, therefore, held that the interest could not be disallowed under section 40(b) of the Act.
4. We have heard Sri Shambhoo Chopra, the learned counsel for the revenue. No body has put in appearance on behalf of the respondent assessee.
4. We have heard Sri Shambhoo Chopra, the learned counsel for the revenue. No body has put in appearance on behalf of the respondent assessee.
5. Under section 40(b) of the Act, any payment of interest made by the firm to any partner of the firm is to be disallowed. Here the firm had paid interest on the deposits which were standing in the name of an association of persons. Under the scheme of the Act, an association of persons is a separate assessable entity. Section 2(30) of the Act defines 'person' to include an association of persons also. Section 2(7) of the Act defines assessee' to mean a person by whom any tax or any other sum of money is payable under the Act. Thus, for all practical purposes, an association of person is treated as an assessee and is different from a firm. It may be mentioned here that section 40(ba) of the Act specifically deals with a situation where an association of persons pays any interest or any other amount to its members. The question is as to whether interest paid by a firm to an association of persons in which one of the partners of the firm is also a member, is to be allowed or not.
5. Under section 40(b) of the Act, any payment of interest made by the firm to any partner of the firm is to be disallowed. Here the firm had paid interest on the deposits which were standing in the name of an association of persons. Under the scheme of the Act, an association of persons is a separate assessable entity. Section 2(30) of the Act defines 'person' to include an association of persons also. Section 2(7) of the Act defines assessee' to mean a person by whom any tax or any other sum of money is payable under the Act. Thus, for all practical purposes, an association of person is treated as an assessee and is different from a firm. It may be mentioned here that section 40(ba) of the Act specifically deals with a situation where an association of persons pays any interest or any other amount to its members. The question is as to whether interest paid by a firm to an association of persons in which one of the partners of the firm is also a member, is to be allowed or not.
6. The Hon'ble Supreme Court in the case of Brij Mohan Das Laxman Das v. CIT (1997) 223 ITR 825 (SC), has held that even for the period anterior to 1-4-1995, any interest paid to a partner who is a partner representing his Hindu Undivided Family on the deposit of his personal/individual funds does not fall within the mischief of clause (b) of section 40. The same principles would be applicable in respect of an interest paid to an association of persons also.
6. The Hon'ble Supreme Court in the case of Brij Mohan Das Laxman Das v. CIT (1997) 223 ITR 825 (SC), has held that even for the period anterior to 1-4-1995, any interest paid to a partner who is a partner representing his Hindu Undivided Family on the deposit of his personal/individual funds does not fall within the mischief of clause (b) of section 40. The same principles would be applicable in respect of an interest paid to an association of persons also.
7. Respectfully following the decision of the Apex Court in the case of Brij Mohan Das Laxman Dass (supra), we are of the considered opinion that the Tribunal has rightly allowed the deduction of interest amounting to Rs. 14,400 and holding it not to be hit by section 40(b) of the Act.
7. Respectfully following the decision of the Apex Court in the case of Brij Mohan Das Laxman Dass (supra), we are of the considered opinion that the Tribunal has rightly allowed the deduction of interest amounting to Rs. 14,400 and holding it not to be hit by section 40(b) of the Act.
8. In view of the foregoing discussions, we answer the question in the affirmative, i.e., in favour of the assessee and against the revenue. There shall be no order as to costs.
8. In view of the foregoing discussions, we answer the question in the affirmative, i.e., in favour of the assessee and against the revenue. There shall be no order as to costs.