JUDGMENT
S.M. Jhunjhunuwala, J.
1. By this reference under section 256(1) of the Income-tax Act, 1961, the Income-tax Appellate Tribunal has referred the following questions of law at the instance of the assessee for the opinion of this court :
“1. Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the interest paid to the partners on the deposit accounts in their individual capacity in the firm for the years under consideration was liable to be disallowed under section 40(b) of the Income-tax Act, 1961 ?
2. Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the action of the Income-tax Officer in initiating reassessment proceedings under section 147 of the Income-tax Act, 1961, was in accordance with law ?”
This income-tax reference relates to the assessment years 1974-75 to 1979-80. At the material times, there were three partners in the firm of the assessee, namely, Ghanshyamdas Kotumal, Gopaldas Ghanshyamdas and Ramesh Ghanshyamdas. Each one of them was a partner in the assessee’s firm in a representative capacity as karta of his Hindu undivided family. In the books of account of the assessee’s firm the said Ghanshyamdas Kotumal, Gopaldas Ghanshyamdas and Ramesh Ghanshyamdas had deposited amounts belonging to them in their individual capacities. The amounts of interest paid by the assessee’s firm on these deposits were claimed as deduction. The Income-tax Officer disallowed the assessee’s claim under section 40(b) of the Income-tax Act, 1961. On appeal by the assessee before the Appellate Assistant Commissioner for the first five years and before the Commissioner of Income-tax (Appeals) for the last year, the Appellate Assistant Commissioner/Commissioner of Income-tax (Appeals) declined to make any distinction in the capacity in which the moneys were invested by the partners in the assessee’s firm and upheld the order of the Income-tax Officer. On further appeal before the Income-tax Appellate Tribunal, the Tribunal held that no interference was called for.
A partnership is a creature of contract. Under Hindu law, a joint family is one of status. The income-tax law gives the Income-tax Officer power to assess the income of a person in the manner provided by the Income-tax Act, 1961. A contract of partnership has no concern with the obligation of the partners to others in respect of their shares of profit in the partnership. It only regulates the rights and liabilities of the partners. A partner may be the karta of a joint Hindu family or he may be a trustee. He occupies a dual position. Qua the partnership, he functions in his personal capacity; qua the third parties, in his representative capacity. This dual position of a partner “qua the partnership” and “qua the third parties” is clearly recognised by the Supreme Court in CIT v. Bagyalakshmi and. Co. [1965] 55 ITR 660. In the case of CIT v. Jhabarmal Agarwalla [1990] 184 ITR 431, a Division Bench of the Gauhati High Court, of which one of us (Dr. B. P. Saraf J.) was a member, after considering the decision of the Supreme Court in CIT v. Bagyalakshmi and Co. [1965] 55 ITR 660 and also of the Allahabad High Court in the case of Madho Prasad v. CIT [1978] 112 ITR 492 has held that in a case where the karta of a Hindu undivided family is a partner in his representative capacity, the income does not arise to him. The income arises to the Hindu undivided family and, by virtue of the provisions of the Income-tax Act, 1961, it is assessable in the hands of the Hindu undivided family. We are in agreement with the view taken in that case by the Gauhati High Court.
Since on the facts of the case, it is crystal clear that the said Ghanshyamdas Kotumal, Gopaldas Ghanshyamdas and Ramesh Ghanshyamdas had deposited amounts with the assessee-firm in their individual capacities and the assessee-firm had paid interest to each one of them on such deposits, the interest paid to each of them in their individual capacities in respect of personal deposits made with the assessee-firm could not be treated as interest paid to their respective Hindu undivided families. The interest received by each one of them was not received in their representative capacities but in the individual capacity of each one of them and, as such, the interest so paid by the assessee-firm was not payment to a partner in the assessee-firm so as to attract the provisions of section 40(b) of the Act. Even in the case of CIT v. Pannalal Hiralal and Co. [1984] 146 ITR 549, a Division Bench of this court has taken the view as herein taken by us. Thus, the first question is to be answered in the negative and in favour of the assessee.
So far as the second question is concerned, it appears that the assessments were originally completed by the Income-tax Officer under section 143(3) of the Act on October 16, 1975, for the assessment years 1974-75 and 1975-76, on May 31, 1977, for the assessment year 1976-77 and on August 31, 1978, for the assessment years 1977-78 and 1978-79. These assessments were reopened by the Income-tax Officer under section 147 of the Act and the only item of additional income included in the assessments was the interest as aforesaid paid by the assessee-firm. The Income-tax Officer initiated reassessment proceedings under section 147(b) of the Act on July 25, 1979, since the audit objections were received from the internal audit party of the Income-tax Department pointing out that the interest paid as aforesaid was wrongly allowed. The Tribunal, the final fact-finding authority under the Act, in the facts of the case, came to the conclusion that the Income-tax Officer had not initiated the proceeding on a mere change of opinion or to give effect to the opinion expressed by the audit parties. The Income-tax Officer had reopened the assessments with a view to implement the law as explained by the High Courts at Madras, Calcutta and Delhi in the cases of A. S. K. Rathnaswamy Nadar Firm v. CIT [1965] 58 ITR 312; Giridharilal Ghasiram v. CIT [1968] 69 ITR 890 and Pannalal Girdharilal v. CIT [1971] 81 ITR 624, respectively which, in the opinion of the Income-tax Officer, was overlooked in the original proceedings. Needless to state the ratio of the judgment of the Supreme Court in the case of Indian and Eastern Newspaper Society v. CIT [1979) 119 ITR 996 squarely applies to the facts of the case and, as such, the Tribunal was justified in holding that the action of the Income-tax Officer in initiating reassessment proceedings under section 147 of the Act was in accordance with law.
3. In view of what is stated above, we answer the abovereferred first question in the negative, that is, in favour of the assessee and against the Revenue and the second question in the affirmative, that is, in favour of the Revenue and against the assessee. There will be no order as to cost