Law:

Section:

Section 40(b) of the income-tax act, 1961-Amounts not deductible-Salary, etc., paid to partners-Whether assessee-firm's claim for deduction of interest paid to its partners could be upheld on the ground that these payments were made to partners in their capacity as individuals whereas they were partners in firm representing their HUF's-Held, no Facts The assessee-firm claimed deduction of interest paid to its two partners on the ground that these payments were made to these partners in their capacity as individuals whereas they were partners in the firm representing their respective HUFs. The ITO disallowed the said claim under section 40(b) and the same was confirmed by the AAC and the Tribunal on appeals. On reference: Held It is well settled that when the karta of a joint Hindu family enters into a partnership with strangers, the members of the family do not ipso facto become partners in that firm. They have no right to take part in its management or to sue for its dissolution. The creditors of the firm would no doubt be entitled to proceed against the joint family assets including the shares of the non-partner coparceners for realisation of their debts. But that is because under the Hindu law, the karta has the right, when properly carrying on business, to pledge the credit of the joint family to the extent of its assets, and not because the junior members become partners in the business. Though the karta of a HUF enters into a partnership with others, the karta in his individual capacity alone is the partner and any payment made to him by way of interest is, therefore, clearly governed by section 40( b). Therefore, the impugned interest payments were rightly disallowed under section 40(b) . Case review Firm Bhagat Ram Mohanlal v. CEPT [1956] 29 ITR 521 (SC), CIT v. Bagyalakshmi & Co. [1965] 55 ITR 660 (SC) andCIT v. London Machinery Co. [1979] 117 ITR 111 (All.) applied. Terla Veeraiah v. CIT [1979] 120 ITR 502 (AP), Addl. CIT v. Vallamkonda Chinna Balaiah Chetty & Co. [1977] 106 ITR 556 (AP) and CIT v. Sanka Sankaraiah [1978] 113 ITR 313 (AP) distinguished. Cases referred to Terla Veeraiah v. CIT [1979] 120 ITR 502 (AP), Addl. CIT v. Chinna…

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