Law:

Section:

section 40(b) of the income-tax act, 1961-amounts not deductible-whether interest paid by the firm to its partners, who were described as kartas of their respective huf's, on deposits made from their respective individual accounts were entitled for deduction in computing the income of the firm-held, no Facts Out of seven partners of the assessee, a firm, three were described in the partnership deed as partners representing as kartas of their respective HUF's, which contributed capital on their behalf. They made certain deposits from their individual funds and the assessee paid interest thereon to them as individuals. The ITO disallowed deduction of those payments and the same was upheld in appeal. The Tribunal, however, held that since those persons were partners of the assessee in a different capacity,viz., as kartas of their respective HUF's, and the deposits were made by them from their individual funds, the interest paid thereon to them as individuals could not be treated as payment to partners within the meaning of section 40(6) and as such, directed deletion of the amounts. On reference: Held It is well settled that when a person in his capacity as a karta of a HUF, entered into a partnership with outsiders, the legal implication was that that person alone was a partner personally inasmuch as, a HUF, could not enter into partnership though it was undoubtedly a 'person' within the meaning of the Act. The interest paid by the assessee to its partners either on the amounts brought by them from their respective HUF funds or from their respective individual funds was in either case, payment of interest to its partners. Section 40(b) made no distinction in respect of the character or capacity in which payments were made to its partners and the said payments were inadmissible as deduction in the assessment of the assessee. Case review Agarwal & Co CIT [1970] 77 ITR 10 (SC); Ram Laxman Sugar Mills v. CIT [1967] 66 ITR 613 (SC) and CIT v. Veeriah Reddiar [1969] 73 ITR 162 followed. Addl. CIT v. Vallamkonda Chinna Bataiah Chetty & Co. (AP) [1977] 106 ITR 556 dissented from. CIT v. Ram Laxman Sugar Mills [1973] 90 ITR 73 (All.) distinguished. Editor's note…

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