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Section 40(b) of the Income-tax Act, 1961 - Business disallowance - Interest, salary, etc., paid by firm to partner - Assessment year 1983-84 - Whether once character of an individual has been treated differently than HUF for purpose of interest under Explanation 2 to section 40(b), same reasoning would apply to cases where payment in form of salary and bonus has been made to a partner in his individual capacity in contra-distinction to his representative character of HUF - Held, yes FACTS The assessee-firm paid salary and bonus to its working partners on account of their having rendered personal services to the firm by virtue of their technical qualification and expertise. However, since those partners represented their respective HUFs, they were treated to be partners for the purpose of disallowance of benefits under section 40(b) by the Assessing Officer. On appeal, the Commissioner (Appeals) deleted the impugned addition on the ground that the salary and bonus were paid to those partners as individuals and, hence, section 40(b) had no application. On appeal preferred by the revenue, the Tribunal dismissed the same. On reference : HELD The controversy has been set at rest by the Supreme Court in Brij Mohan Das Laxman Das v.CIT [1997] 1 SCC 352. The view taken by the Rajasthan High Court in Gajanand Poonam Chand & Bros. v. CIT [1988] 174 ITR 346/ 39 Taxman 104, has been approved by accepting that Explanation 2 added to section 40(b) is declaratory in nature and the same is to apply to the cases concerning assessment years prior to 1-4-1985. [Para 7] Once the character of an individual has been treated differently than HUF for the purposes of interest, there is no reason as to why that would no extend to the salary and bonus paid to such partners on account of their personal services rendered to the firm in contra-distinction to their capacity as representatives of HUF. Therefore, the same reasoning would apply to the cases where payment in the form of salary and bonus has been made to a partner in his individual capacity in contra-distinction to his representative character of the HUF. [Para 9] Therefore, the Tribunal was right in law in allowing the…

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