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Section 40(b) of the Income-tax Act, 1961 - Amounts not deductible - Interest, salary, etc., paid by firm to partner - Female member of huf partner of assessee-firm, gifted Rs. 35,000 to huf which lent same on interest to firm - Whether tribunal correct in holding that gift was valid and that interest on Rs. 35,000 paid by assesses was deductible - Held, yes Facts Smt. P, a member of the HUF, was also a partner of the assessee-firm. The HUF had lent to the assessee-firm Rs. 1,50,734 as on 31-03-1965. This was partitioned amongst the coparceners and Smt. P by metes and bounds so that the HUF had no amount to its credit as on 31-03-1966. Thereafter, the coparceners occasionally blended their individual money with common hotchpot of the HUF with the result that the HUF had again some capital invested in the firm. In the assessment year 1974-75, Smt. P claimed to have made a gift of Rs. 35,000 to the HUF, which was deposited in the latter's loan account with the assessee and earned an interest of Rs. 5,250. The ITO disallowed under section 40(b ) this interest of Rs. 5,250 holding (i) that Smt. P, being a female, could not blend her own property with that of HUF; and (ii) that she could not also make a valid gift to the HUF. Both the AAC and the Tribunal confirmed this disallowance. On reference: Held 1. A female member of HUF was not entitled to blend her individual property with that of HUF but she could make a valid gift of her individual property to the HUF. The sum of Rs. 35,000 was, therefore, a valid gift to the HUF and as such, the loan to the assessee was from the HUF and not from Smt. P, a partner. 2. Since the provisions of section 40(b) were not thus attracted, the impugned interest was rightly allowable in the assessment of the firm Case Review Pushpa Devi v. CIT [1977] 109 ITR 730 (SC) followed. CIT v. London Machinery Co. [1979] 117 ITR 111 (All.)distinguished. Editor's Note The Court declined to entertain the claim of the revenue to call for a supplementary statement of the case to see whether (a) the loan in the books of the firm was in the name of Smt. P or HUF; and (b) if the former, the interest was rightly disallowed. The Court held that the…

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