Law:

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Section 40(b) of the Income-tax Act 1961 - Business disallowance - Interest, salary etc. paid by firm to partner - Assessment years 1970-71, 1972-73 and 1973-74 - Whether only net amount of interest paid to a partner after deducting interest paid by him could be added to firm's income under section 40(b) - Held, yes FACTS The assessee was a partnership firm. Its partners had a capital account as well as a current account with the firm. The firm paid interest to the partners on the balances in the capital account. The firm also charged interest from the partners on the debit balances of their current account. The ITO disallowed the entire amount of interest paid by the firm to its partners in respect of the capital account under section 40(b). The AAC held that it was the net amount paid by the firm to the partner, after adjusting the interest paid by the partner to the firm, that alone could be disallowed under section 40(b). The Tribunal affirmed the view taken by the AAC. On reference : HELD In view of the decision of same High Court in Sri Ram Mahadeo Prasad v. CIT [1953] 24 ITR 176 , it was held that only net amount of interest paid to a partner after deducting interest paid by him could be added to the firm's income under section 40(b). Note : The case was decided in favour of the assessee. CASES REFERRED TO Sri Ram Mahadeo Prasad v. CIT [1953] 24 ITR 176 (All.) and CIT v. London Machinery Co. [1979] 117 ITR 111 (All.). JUDGMENT Sattsh Chandra, C.J.-The assessee was a partnership firm. Its partners had a capital account as well as a current account with the firm. The firm paid interest to the partners on the balances in the capital account. The firm also charged interest from the partners on the debit balances of their current account. For the assessment years 1970-71, 1972-73 and 1973-74, the ITO disallowed the entire amount of interest paid by the firm to its partners in respect of the capital account under s. 40(b)…

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