Law:

Section:

Section 40(b) of the Income-tax Act, 1961 - Business disallowance - Interest paid to partner in firm - Assessment year 1978-79 - Whether where karta of certain HUF is partner in assessee-firm in his individual capacity and firm has two accounts, one in his name as individual and other of HUF represented by him, interest paid by firm to HUF could be disallowed under section 40(b) - Held, no Facts One K was a partner in his individual capacity in the assessee-firm. There were two accounts in the assessee-firm, one of K as a partner in his individual capacity and the other of the HUF represented by him as the karta. Interest was paid by the assessee-firm during the relevant period on both these accounts. The ITO also disallowed under section 40(b) the interest paid to the HUF represented by K. On second appeal, the Tribunal held that the interest paid to the HUF represented by K was not hit by the prohibition contained in section 40(b) inasmuch as K was a partner in the assessee-firm only in his individual capacity and not in his representative capacity. On reference: Held Following the decision of this Court in the case of Gajanand Poonam Chand & Bros. v. CIT [D.B. IT Reference Nos. 1 and 2 (Jodhpur) of 1982, dated 6-5-1988] it was to be held that the payment of interest to the HUF represented by K as the karta was not payment of that amount to a partner of the firm, since K was a partner only in his individual capacity and not also in his representative capacity. The view taken by the Tribunal, being in consonance with this view, was to be upheld. Case referred to Gajanand Poonam Chand & Bros. v. CIT [D.B. IT Reference Nos. 1 and 2 (Jodhpur) of 1982, dated 6-5-1988]. N.M. Ranka and N.K. Jain for the Applicant. V.K. Singhal for the Respondent. ORDER 1. This reference under section 256(1) of the Income-tax Act, 1961 ('the Act'), is 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 justified in deleting the disallowance of interest of Rs. 2,125 made under section 40(b) of the Income-tax Act 1961?" 2. The relevant assessment year is 1978-79. One Kishanlal was…

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