ORDER
S.V. Maruthi, J.
1. At the instance of the assessce, the following two questions have been referred for the opinion of this Court:
1. “Whether on the facts and in the circumstances of the case, the Appellate Tribunal was right in holding that the sum of Rs.25,000/- and Rs. 18,950/-should be added under Section 40(b) of the Act, for the assessment year 1980-81.
2. Whether on facts and in the circumstances of the case, the Appellate Tribunal was right in holding that the sum of Rs.4.296/- and representing interest paid on H.U.F. credit balances should be added under the provisions of the Section 40(b) of the Income Tax Act, 1961 for the assessment year 1980-81.”
2. The facts in brief arc as follows:
The assessee is a firm dealing in fertilisers, pesticides, insecticides, oil engines etc., besides doing money-lending business. The assessee paid salary of Rs.25,000/- to the partners and credited interest to the partner’s account on salary accumulations. The partners are partners in the firm in their capacity as the karthas of the respective joint families. The salary and the interest were paid to them in their individual capacity. The Income Tax Officer added the amounts to the income of the firm. The appellate authority agreed with
the Income Tax Officer. On an appeal, the Tribunal confirmed the view of the appellate authority. At the instance of the assesscc, the first question was referred. As regards the second question, an amount of Rs.4,296/-was paid to the partner in this capacity as kartha of joint family. The Tribunal held that this amount has also to be added back to the income of the firm. At the instance of the assessee, question No.2 was referred for the opinion of this Court.
3. The learned Counsel appearing for the assessee relying on the judgment of this Court in N.T.R Estate v. Commissioner of Income Tax, and A. Ramakrishaniah, B. Narayana & Co. v. CIT, , contended that in the case of a partner of a firm in his capacity as the kartha of HUF, any salary paid to him cannot be added to the income of the firm. While the Counsel for the revenue contended that this is a salary paid to the partner in his individual capacity and not to the partner representing the HUF. Therefore, it is to be added to the income of the firm under Section 40(b) of the Income Tax Act. Learned Counsel also submitted that the judgment in N.T.R. Estate (supra) and judgment in A. Ramakrishnaiah, B. Narayana (supra) are not correctly decided and require reconsideration.
4. In N.T.R. Estates v. CIT, the question that arose for consideration is whether the salary payment of Rs.15,000/- in the assessment year 1973-74 and Rs.24,000 in the assessment year 1974-75 are attracted by Section 40(b) of the Income Tax Act, 1961, and are not deductible? This Court held that:
“…In order to determine whether the salary paid to a partner should be allowed as a deduction in computing the income of the partnership firm, it is necessary to examine who is the real recipient of the salary paid to the partner. If the recipient is a kartha of a HUF and the payment of salary has no real sufficient connection
with the share held by the joint family through the partner concerned, then the salary paid to the partner for his individual services cannot be disallowed in the computation of the income of the partnership firm. If, however, the real recipient of the salary is the joint family, although it was paid ostensibly to the partner, then the salary paid falls to be disallowed under Section 40(b) of the Act.”
5. On the facts of that case, the learned Judges held that salary and interest paid by the firm to some of the partners as individuals, while they had become partners in their capacity as kartas of Hindu undivided families during the accounting years relevant to the assessment years 1973-74 and 1974-75 could not be disallowed under Section 40(b).
6. In A. Ramakrishnaiah, B. Narayana & Co. v. CIT, (supra), the question that arose for consideration is whether the Tribunal was justified in law in disallowing the remuneration paid to A. Ramakrishnaiah and B. Narayana for their services under Section 40(b) of the Income Tax Act in the hands of the firm? Answering the reference in favour of the assessee and against the revenue, the learned Judges relied on the judgment of N.T.R. Estate’s case (supra). It was held:
“…In the present case, admittedly, the salary paid to the individual is assessed only in his hands in the status of an individual. If this salary is added back under Section 40(b), it will increase the total income of the firm and thereby the share of the Hindu undivided family, on which the family has to bear a higher burden of tax even though they do not share the actual salary which goes only to the individual. Likewise, the other partners also have to bear the higher burden of tax even though the salaries paid to the individual do not really represent the share of profit. This also follows from the provisions of the Hindu Gains of Learning Act, (Act 30 of
1930), under which the gains of learning must be held to be separate property of the individual and cannot be treated as part of the income of the joint family. Once the joint family is recognised as the real partner of the firm, the law has departed from original position of recognising only the individual as a partner and, consequently, it must also be recognised that the salary paid to the individual not being part of the income of the firm, cannot be taken as part of the share of profit of a partner. In the circumstances, when Section 40(b) refers to the salary paid to a partner, it cannot take into account the salary paid to the individual as a representative of the joint family as he is not a partner in his individual capacity. In view of this position, we are not inclined to agree with the submission of learned Counsel for the Revenue that the decision of this Court in NTR Estate’s case requires reconsideration.”
7. In other words, it follows that any salary paid to the partner, who represents the HUF, cannot be added to the income of the firm. However, any payment made to the individual as a partner, it can be added to the income of the firm.
8. The Supreme Court in Suwalal Awandilal Jain v. Commissioner of Income Tax, , observed:
“…The question yet remains where an individual is a partner in one capacity, e.g., as a representative of another person, can he have no other capacity vis-a-vis the firm, To be more precise, does the above position of law preclude an individual, who is a partner representing a Hindu undivided family, from depositing his personal funds with the partnership and receiving interest thereon? Explanation 2 says in clear terms that there is no such bar. This is the legislative recognition of the theory of different capacities an individual may hold – no doubt confined to clause (b) of
Section 40. Once this is so, we see no reason to hold that this theory of different capacities is not valid or available for the period anterior to April 1, 1935. Accordingly, we hold that even for the period anterior to April 1, 1985, any interest paid to a partner, who is a partner representing his Hindu undivided family, on the deposit of his personal/individual funds, docs not fall within the mischief of clause (b) of Section 40. In this view of the matter, we agree with the view taken by the Rajastlian High Court in Gajanand Poonatn Chand and Bras’ case, (1988) 174 ITR 346: that Explanation 2, in the context of clause (b) of Section 40, is declaratory in nature.”
9. In other words, though a person representing the HUF becomes a partner of the firm, there is no bar for earning the salary in his individual capacity for rendering services to the firm. If any salary is paid to the said partner for rendering services in his individual capacity, not as a partner representing the HUF, then it cannot be treated that the payment is made as a partner in his individual capacity. If the payment is made in his individual capacity and not as a partner, Section 40(b) is not applicable as Section 40(b) applies only to any payment made to a person in his capacity as a partner of the firm. If the payment made to the partner not in his capacity as partner, but in his individual capacity, then Section 40(b) is not applicable. Therefore, we have to see on the facts and circumstances of the case whether the payment of salary is in his capacity as partner representing HUF or in his individual capacity.
10. The Income Tax Officer, in the assessment, order, found that the payments are made to individuals and partners being minor H.U.F. such remuneration is paid for services rendered in their individual capacity and therefore docs not constitute the income in their respective family. The said remuneration shall be charged on the profits of the firm. In other words, the finding
of the assessing officer is that the payments are made to the partners in their individual capacity for the services rendered by them. It is not a payment to the partner in his capacity as a partner representing HUF, but in his individual capacity for services rendered by them. In view of the findings of the ITO that the payment is for services rendered in their individual capacity and not as partners, Section 40 (b) is not applicable to the facts of the present case.
11. We have already referred to the observations of this Court in A. Ramakrishnaiah’s case (supra). This Court held taking into account the Hindu Gains of Learning Act, (Act 30 of 1930), under which the gains of learning must be held to be separate property of the individual and cannot be treated as part of the income of the joint family. In the light of the facts of this case, and in view of the judgment of the Supreme Court in Suwalal Anandilal (supra), we are of the opinion that the first question referred is to be answered in the negative and in favour of the assessee. We do not agree with the contention of the Counsel for the Revenue that the judgment in NTR Estate’s case (supra) and A. Ramakrishnaiah’s case (supra) require re-consideration.
12. As regards the second question, in view of clause (ii) under Explanation 2 under Section 40(b) stating that interest paid by the firm to such individual as partner in a representative capacity shall be taken into account for the purpose of this clause, the view expressed by the Tribunal that the interest paid to the HUF should be added under Section 40(b) is correct. The question No.2 is accordingly answered in the affirmative and against the assessee.
13. The reference is answered accordingly.