JUDGMENT JUDGMENT judgment of court was delivered by P. D. MULYE J.-The Income-tax Appellate Tribunal, Indore Bench, Indore, at instance of assessee has made this reference under section 256(1) of Income-tax Act, 1961, for opinion of court on following question of law: " Whether, on facts and in circumstances of case, interest of Rs. 4,234 paid to Hindu undivided family, Hashmatrai Balchand, creditor of firm, was allowable under section 36(1)(iii) of Income-tax Act, 1961? " Facts giving rise to this reference as per statement of case received may be stated in brief thus: assessee is registered firm. previous year relevant to assessment year 1976-77 ended on March 31, 1976. return under section 139(1) of Act was filed on July 26, 1976, declaring income of Rs. 73,410. Income-tax Officer in assessment order pointed out that Shri Hashmatrai (individual), who is partner in firm, made transfer of Rs. 51,000 on April 1, 1970, to his own Hindu undivided family by withdrawing from his individual account maintained by firm and said amount has been credited in Hindu undivided family's account in firm. He also pointed out that amount of interest on credit balance standing in Hindu undivided family's account was assessable in hands of individual partner in view of provisions of section 64(2)(b) of Act. He further held that interest payment in question was to partner and, as such, same would be added back in total income of assessee. Consequently he added sum of Rs. 4,234 in income of assessee and thus assessment was completed on total income of Rs. 73,493. Being aggrieved with order of Income-tax Officer, assessee went up in appeal before Appellate Assistant Commissioner who dismissed appeal. assessee thereafter went in second appeal before Tribunal before whom it was contended on behalf of assessee that partner, Hashmatrai, transferred sum of Rs. 51,000 from his account in firm to credit of his Hindu undivided family of which he was head in his individual capacity; that in assessment order of firm for assessment year 1974-75, interest has been added in hands of individual partner and that, therefore, interest paid to Hindu undivided family should not have been disallowed and he placed reliance on decision in CIT v. Sajjanraj Divanchand [1980] 126 ITR 654 (Guj). contention of departmental representative was that in terms of section 40(b) of said Act, any interest paid to any partner cannot be allowed. So, in present case, Income-tax Officer rightly disallowed interest and reliance was placed on decision in CIT v. London Machinery Co. [1979] 117 ITR 111 (A11). Tribunal, after hearing parties, held as under: " contents of page 8 of assessee's paper book, i.e., disallowance of interest during assessment year 1974-75 do not lead anybody anywhere. In circumstances of assessee's case, in terms of section 64(2)(b) of Act, interest income in dispute accrues to partner as individual and not to Hindu undivided family. Thus, it is safe to infer that payment of interest said to have been made to Hindu undivided family, in fact, was made to partner. Such payment of interest to partner in terms of section 40(b) cannot be allowed. ratio in case of Sajjanraj Divanchand [1980] 126 ITR 654 (Guj), in peculiar circumstances, does not appear to help assessee. above addition of interest and confirmation, therefore, do not appear to be incorrect and, therefore, impugned order requires no interference." Hence, this reference. learned counsel for assessee placed reliance on decision in CIT v. Sajjanraj Divanchand [1980] 126 ITR 654 (Guj), wherein it has been held that (headnote at pp. 654 and 655): " Hindu undivided family cannot be partner in firm. Only individual person in his own right can be partner in firm. Since Hindu undivided family cannot be partner in firm, whoever represents Hindu undivided family in firm is partner for all practical purposes both of partnership law and income-tax law. It is, therefore, not possible to proceed on footing that Hindu undivided family is partner in firm for purpose of section 40(b) of Income-tax Act, 1961." In this decision, it has further been held that (headnote at p. 655),: " There were two separate accounts and in account of Hindu undivided family, it was shown that Hindu undivided family was creditor of firm and on amount standing to credit of Hindu undivided family, interest of Rs. 7,777 was paid by firm to Hindu undivided family. There was separate account of individual partner, SJ, and in that account no interest was paid in relevant year. Therefore, amount of Rs. 7,777 was paid by way of interest to Hindu undivided family which was creditor of firm. fact that the' karta' of Hindu undivided family was partner of assesseefirm was not relevant because, under section 40(b), it is only interest paid to partner which is not allowed to be deducted. Interest paid to any other creditor of firm cannot be disallowed under provisions of section 40(b)." Full Bench of Gujarat High Court in its decision in Chhotalal & Co. v. CIT [1984] 150 ITR 276 (Guj) has overruled decision in CIT v. Sajjanraj Divanchand [1980] 126 ITR 654 (Guj). However, on going through said decision, we find that it has also been held that disallowance of interest paid by firm can be made under section 40(b) only if interest is paid by firm to partner in his capacity as partner of assessee-firm. It has also been held that no disallowance of interest can be made under section 40(b) if interest is paid by firm to partner in capacity other than capacity of partner. In above case, partner of firm was representing Hindu undivided family in firm, but interest was paid by firm to partner in capacity of individual in respect of disputed funds belonging to him as individual and, therefore, it has been held that section 40(b) was not applicable to payment of such interest to partner and accordingly laid down that disallowance of interest paid by firm to partner was not justified. Therefore, it is apparent that interest paid to partner of firm by firm in respect of deposits made by bigger Hindu undivided family cannot be disallowed under section 40(b) because partner of firm to whom interest was paid had different capacity while receiving interest. He received interest from firm as representative of bigger Hindu undivided family whereas he was partner in assesseefirm in capacity of individual. Therefore, interest was paid not to partner of firm and disallowance under section 40(b) cannot be made in case of firm. Therefore, it is not quite clear on what point this Full Bench has overruled earlier decision. We may note at this stage that against decision in CIT v. Sajjanraj Divanchand [1980] 126 ITR 654 (Guj) special leave petition was sought by Department before Supreme Court of India, but same was refused as would be clear from note at page 15 in [1983] 144 ITR (Statutes). It appears that this fact was not brought to notice of Full Bench. learned counsel also relied on decision in CIT v. Pannalal Hiralal & Co. [1984] 146 ITR 549 (Bom). learned counsel for Revenue submitted that question referred by Tribunal in fact does not arise because according to learned counsel for Revenue, assessee who was partner in firm had transferred some amount to Hindu undivided family account in same firm and thus interest that accrued on this amount was being paid to partner as such and, therefore, such interest paid could be disallowed under section 40(b) of Income-tax Act. He further submitted that according to section 64(2) of Income-tax Act, which was inserted by Taxation Laws (Amendment) Act, 1970, with effect from April 1, 1971, it has been provided that: " Where, in case of individual being member of Hindu undivided family, any property having been separate property of individual has, at any time after 31st day of December, 1969, been converted by individual into property belonging to family through act of impressing such separate property with character of property belonging to family or throwing it into common stock of family or been transferred by individual, directly or indirectly, to family otherwise than for adequate consideration (the property so converted or transferred being hereinafter referred to as converted property), then, notwithstanding anything contained in any other provision of this Act or in any other law for time being in force, for purpose of computation of total income of individual under this Act for any assessment year commencing on or after 1st day of April, 1971,-- (a) individual shall be deemed to have transferred converted property, through family, to members of family for being held by them jointly; (b) income derived from converted property or any part thereof shall be deemed to arise to individual and not to family;... Provided that income referred to in clause (b) or clause (c) shall, on being included in total income of individual, be excluded, from total income of family, or, as case may be, spouse or minor child of individual." learned counsel for Revenue also placed reliance on decision in CIT v. London Machinery Co. [1979] 117 ITR 111 (A11) and Jalam Chand Mangilal (No. 2) v. CIT [1982] 138 ITR 347 (MP), wherein it has been held that (headnote): " Irrespective of capacity in which person becomes partner of firm, section 40(b) is bar to payment of interest to him. main fact to be considered for applying section 40(b) is not as to in what capacity loan was advanced or interest was paid to partner but whether interest was paid to person who had joined as partner of firm. Where person joined as partner of firm in his individual capacity and interest was paid to him as karta of Hindu undivided family, payment of interest was not deductible in hands of firm in view of provisions of section 40(b)." He, therefore, submitted that admittedly one of partners of firm having transferred amount in partnership firm to account of Hindu undivided family, though not as creditor of firm, interest paid obviously should be deemed to have been paid to partner of firm, whatever may be capacity in which same is paid. However, after hearing learned counsel and after going through case law, we are of opinion that provision has been interpreted by making subsequent amendment to section 40(b), Explanation 2, which was inserted by Taxation Laws (Amendment) Act, 1984, with effect from April 1, 1985, that: " Explanation 2.-Where individual is partner in firm on behalf, or for benefit, of any other person (such partner and other person being hereinafter referred to as'partner in representative capacity' and 'person so represented' respectively),: (i) interest paid by firm to such individual or by such individual to firm otherwise than as partner in representative capacity, shall not be taken into account for purposes of this clause; (ii) interest paid by firm to such individual or by such individual to firm as partner in representative capacity and interest paid by firm to person so represented or by person so represented to firm, shall be taken into account for purpose of this clause. Explanation 3.-Where individual is partner in firm otherwise than as partner in representative capacity, interest paid by firm to such individual shall not be taken into account for purposes of this clause, if such interest is received by him on behalf, or for benefit, of any other person." Though this Explanation is not applicable to present case as it was brought into effect from April 1, 1985, still Explanation so added points out brought into effect from April 1, 1985, still Explanation so added points out effect of interest paid in such cases. That apart, it was not disputed that there is circular issued by Department, which is binding on Department. Thus, we are of opinion that authority cited by learned counsel for Revenue being distinguishable does not support contention of Revenue on facts and circumstances of case. In result, this reference is answered in favour of assessee and against Department with no order as to costs. *** BALCHAND HASHMATRAI & CO. v. COMMISSIONER OF INCOME TAX