Law:

Section:

Section 40(b) of the Income-tax Act, 1961 - Business disallowance - Interest, salary etc. paid by firm to partner - Amount of capital was initially credited in names of three partners of assessee firm - For relevant year, said capital was transferred by them to their HUF's and interest on capital was accordingly credited to accounts of HUF's - ITO disallowed assessee's claim of deduction u/s 40(b) - Whether since interest was paid to HUF's and not to individual partners of firm, interest could not be disallowed under section 40(b) - Held, yes FACTS The assessee firm claimed deduction of interest under section 40(b ) on the ground that the interest was paid not to any partner of the firm but to the respective HUF's of which the three partners were the members. Initially the amount of capital was credited in the names of the individual partners but the accounts relevant for the assessment years in question showed the capital of the firm credited in the name of the HUFs and the interest was also accordingly credited to these accounts. The ITO and the AAC rejected the assessee's claim. On appeal, the Tribunal held that the partners were not obliged to contribute any capital and therefore any interest paid on such capital could not be treated as interest paid to the partners. It further held that merely because at any stage the amount of capital now standing transferred to the HUFs was shown in the accounts as capital of the partners for the previous year, that could not be a ground of ignoring the partial partition recognised by the ITO and ignoring the entries in the account relevant for the relevant assessment year. On reference: HELD On the facts the Tribunal had found that the interest was paid to the HUF and not to the individual partners of the firm. That being the finding of fact which the Tribunal could reach on the material before it, the interest paid by the assessee to the HUFs could not be disallowed under section 40(b ). Note: The case was decided in favour of the assessee. CASE REVIEW Addl. CIT v. Vallamkonda Chinna Balaiah Chetty and Co.[1977] 106 ITR 556 (AP)followed and relied upon. CIT v. T. Veeraiah and K. Narasimhulu[1977] 106 ITR 283 (AP) and…

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