Law:

Section:

Section 40(b) of the income-tax act, 1961-Amounts not deductible-Interest, salary, bonus, etc., paid to partner by firm-One of the partner joined assessee-firm as karta of HUF-Interest of Rs. 7,777 credited to HUF as creditor-Whether interest payment was permissible deduction under section 40(b )-Held, on facts, yes Facts The assessee-firm had three partners, including S in his capacity as the karta of an HUF. The assessee had two separate accounts in its books, i.e., one in the individual name of S and the other in the name of HUF as creditor. During the assessment year 1972-73, Rs. 7,777 was paid as interest to the said HUF by crediting its account. No interest was paid in the account of the individual. The ITO and the AAC, on appeal, disallowed the said amount by applying section 40(b). On further appeal, the Tribunal following its earlier order for the assessment year 1971-72, allowed the impugned deduction. On reference : Held 1. It was clear that an HUF cannot be a partner in a firm and only an individual person in his own right can be a partner. The ITO and the AAC, in the instant case, had proceeded on the footing that the HUF of S was the partner. That, in the eye of law, was an impossibility and their entire basis was untenable. The fact that the HUF "karta" was a partner, was totally besides the point because under section 40(b) only the interest paid to the partner was not deductible and not the interest paid to any other creditor. 2. Section 40(b ) merely looks to the factum of payment of interest paid to a partner and not in what capacity it is paid to him. If, on an examination of the facts of a particular case, it emerges that HUF is a creditor of the firm, then section 40(b) would not apply. In every case, the test to be applied is as to who is the partner and irrespective of the character in which he is the partner, whether any interest is paid to him as partner. If the firm's creditor is not the partner but the HUF of which the partner is the karta, then a separate entity is the firm's creditor and interest paid to that separate entity will not be governed by section 40(b) and cannot be disallowed. In the instant case, the interest was paid…

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