Madhya Pradesh H.C : Whether the Tribunal was correct in allowing the assessee’s claim for interest paid on the credit balance in the individual account of Shri Prakashchand ?

Counsel Appeared

Rawat, for the Revenue : B.L. Nema, for the Assessee

D. OJHA, C.J.:

The following question of law was referred to this Court for its opinion under s. 256(1) of the IT Act, 1961 “the Act” :

“Whether the Tribunal was correct in allowing the assessee’s claim for interest paid on the credit balance in the individual account of Shri Prakashchand ?”

2. The facts in a nutshell giving rise to the aforesaid question were that the assessee, Narbharam Popat Bhai & Sons, Raipur, is a firm and Prakashchand, son of Narbharam Popat Bhai, is a partner of the firm in his capacity as a Karta of the family consisting of himself, his wife and a minor son. The firm paid a sum of Rs. 18,385 as interest to Prakashchand in his individual status. This amount of interest was disallowed by the ITO under s. 40(b) of the Act, on the ground that the firm was not entitled to deduction on account of this interest, the same having been paid to a partner. The order of the ITO was upheld on appeal by the CIT (Appeals). The Tribunal, however, relying on two decisions of the Bombay High Court in CIT vs. Hansa Dyeing & Printing Works 1976 CTR (Bom) 482 : TC33R.298 and CIT vs. Raghavji Anandji & Co. (1975) 100 ITR 246 (Bom) : TC33R.1305, allowed the claim for interest made on behalf of the assessee. However, on an application having been made in this behalf by the Department under s. 256(1), the question aforesaid was referred to this Court for its opinion.

3. When the matter came up before a Division Bench of this Court, it was of the view that there was divergence of opinion among various High Courts regarding the application of s.40(b) in respect of payment of interest to a partner of the firm, as a non-allowable or allowable deduction. On this view, the matter was referred to a Full Bench of this Court. The Full Bench noticed the decisions of various High Courts and took the view that the decision in Chhotalal & Co. vs. CIT (1985) 44 CTR (Guj) (FB) 149 : (1984) 150 ITR 276 (Guj) (FB) :TC33R.291 lays down the correct law as has been made clear by the Andhra Pradesh High Court in NTR Estate vs. CIT (1985) 49 CTR (AP) 85 : (1986) 157 ITR 285 (AP) : TC33R.331 and by this Court in Balchand Hashmatrai & Co. vs. CIT (1986) 53 CTR (MP) 452 : (1986) 161 ITR 121 (MP) : TC33R.296, that if a person is a partner in a firm in a representative capacity and if such partner lends to the partnership moneys belonging to him individually, then the interest paid to such partner on the moneys lent by him is not liable to be added back under s. 40(b). The view to the contrary taken by some other High Courts was not accepted by the Full Bench. The present application has been made on behalf of the CIT under s. 261 of the Act for grant of a certificate of fitness.

4. Having heard counsel for the parties, we are of the opinion that there is no manner of doubt that the question which came up for consideration before the Full Bench of this Court, is a substantial question of law of general importance. We are further of the opinion that since there is divergence of opinion among various High Courts, this is a fit case where the question involved may be decided by the Supreme Court so that the controversy may be finally set at rest.

In the result, we certify that the case involves a substantial question of law of general importance which needs to be decided by the Supreme Court. In the circumstances of the case, however, parties shall bear their own costs.

[Citation : 170 ITR 612]