JUDGMENT
S.V. Marutih, J.
1. At the instance of the assessee, 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 the 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 Hindu undivided family credit balances should be added under the provisions of Section 40(b) of the Income-tax Act, 1961, for the assessment year 1980-81 ?”
2. The facts in brief are 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 partners’ account on salary accumulations. The partners are partners in the firm in their capacity as the kartas 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 asses-see, the first question was referred. As regards the second question, an amount of Rs. 4,296 was paid to the partner in his capacity as karta of the 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. Learned counsel appearing for the assessee relying on the judgments of this court in N. T. R. Estate v. CIT and A. Rama-krishnaiah, B. Narayana and Co, v. CIT , contended that in the case of a partner of a firm in his capacity as the karta of a Hindu undivided family, any salary paid to him cannot be added to the income of the firm. While 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 Hindu undivided family. 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 v. CIT and the judgment in A. Ramakrishnaiah, B Narayana and Co. v. CIT are not correctly decided and require reconsideration.
4. In N.T.R. Estate 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 (headnote) :
“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 partner as karta of a Hindu undivided family and the payment of salary has no real and 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 the 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. Namyana and Co. v. CIT , 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 v. CIT . It was held (page 158) :
“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 the 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 N.T.R. Estate’s case requires reconsideration.”
7. In other words, it follows that any salary paid to the partner, who represents the Hindu undivided family, 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 Anandilal Jain v. CIT observed (page 756) :
“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, 1985, 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, does 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 Rajasthan High Court in Gajanand Poonam Chand and Bros.’ 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 Hindu undivided family becomes a partner of the firm, there is no bar for him earning 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 Hindu undivided family, 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 is 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 the Hindu undivided family 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 Hindu undivided family such remuneration is paid for services rendered in their individual capacity and therefore does 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 the Hindu undivided family, but in his individual capacity for services rendered by them. In view of the finding of the Income-tax Officer 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. Rama-krishnaiah’s case . This court held taking into account the Hindu Gains of Learning Act (Act 50 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 Jain’s case , 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 counsel for the Revenue that the judgments in N. T. R. Estate’s case and A. Ramakrishnaiah’s case require reconsideration.
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 purposes of this clause, the view expressed by the Tribunal that the interest paid to the Hindu undivided family should be added under Section 40(b) is correct. Question No. 2 is accordingly answered in the affirmative and against the assessee.
13. The reference is answered accordingly.