Law:

Section:

Section 40(b) of the income-tax act, 1961-Amounts not deductible-Salary, etc., paid to partners-Loans advanced by huf to assessee-firm in which karta was a partner in his individual capacity-Interest payments made to creditor-huf through its karta could be disallowed-Held, on facts, no Facts The assessee-firm had received certain loans from a HUF, the karta of which was one of its partners in his individual capacity, and had credited in its account books the interest paid thereon to the HUF. The interest thus paid was deducted by the assessee in computing its profits for the assessment years 1971-72, 1972-73 and 1973-74. The ITO held that since the payment of interest was made to the karta of the creditor-family who was a partner, it was not deductible in terms of section 40(b). On appeal, the AAC upheld the ITO's decision. On second appeal, the Tribunal also held the view that section 40(b) placed absolute prohibition against making payment of interest to a partner in whatever capacity he might receive the same. On reference: Held It is a clear finding of facts by the Tribunal that the amounts were advanced by the HUF of which one of the partners of the firm happened to be the karta, and that the interest was paid not to the partner but to the HUF. In view of this, the impugned payment could not be pushed into the framework of section 40(b ) unless by a travesty of the factual position. The fact that the hand which actually might receive the interest for and on behalf of the HUF ii its karta, could not make any difference in substance in view of the finding that the interest really belonged to the HUF which had advanced the amounts to the firm. While a HUF is by no means a pure abstraction, its structure and its way of existence is such that it has to have some human activist to discharge its responsibilities and manage its affairs. It is in this way that the kartafigures in all transactions of the joint family. The Tribunal was, therefore, not right in holding that payments of interest to the HUF through its karta were to be disallowed as deduction under section 40(b ). Editor's note In view of the above decision, another reference in which the ITO after…

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