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Section 40(b) of the Income-tax Act, 1961 - Business disallowance - Interest, salary, etc., paid by firm to partner - Assessment year 1978-79 - Whether only net amount of interest paid by firm to its partner after adjusting interest paid by that partner to firm can be disallowed under section 40(b) - Held, yes FACTS During the relevant assessment year, the assessee-firm had received interest from one of its partners. The firm also had paid interest to him on the credit balance in his capital account. The assessee offered to pay tax on the different between the two amounts. The ITO, however, rejected that claim on the basis of section 40(b). The AAC, however, upheld the assessee's contention. The Tribunal had taken the same view. On reference: HELD As held in CIT v. Motilal Ramjiwan & Co. [1988] 171 ITR 294 (Raj.), in such a situation, only the net amount paid by the firm to its partner, after adjusting the interest paid by the partner to the firm, can be disallowed under section 40(b). The Tribunal's view being the same, was to be accepted. Note: The decision was in favour of assessee. CASE REFERRED TO CIT v. Motilal Ramjiwan & Co. [1988] 171 ITR 294 (Raj.). B.R. Arora for the Applicant. JUDGMENT This is a reference under section 256(1) of the Income-tax Act, 1961, at the instance of the Revenue to answer the following question of law: "Whether, on the facts and in the circumstances of the case, the Tribunal was legally justified in holding that interest of Rs.…

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