Law:

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Section 40(b) of the Income-tax Act, 1961 - Business disallowance - Interest, salary, etc., paid by firm to any partner - Assessment year 1973-74 - Whether only excess of interest paid by assessee-firm to its partner over and above interest received by it from partner is disallowable under section 40(b) - Held, yes FACTS For the assessment year 1973-74, the assessee-firm claimed that under section 40(b) disallowance of interest should be restricted to the net amount of interest paid to the partners. The ITO did not accept this claim. The AAC upheld the assessee's claim and the Tribunal held that only the net amount of interest paid to a partner after deducting the interest paid by him could be added to the firm's income under section 40(b). On reference: HELD In view of the Supreme Court's decision in Keshavji Ravji & Co. v. CIT [1990] 183 ITR 1/ 49 Taxman 87, the interest paid to a partner by the firm in excess of what is received from the partner could alone be included under section 40(b) in computing the firm's profits. Hence, the Tribunal's view in the instant case was in consonance with the above decision and was to be upheld. CASE REVIEW Keshavji Ravji and Co. v. CIT [1990] 183 ITR 1 (SC)followed and relied upon. CASES REFERRED TO Keshavji Ravji & Co. v. CIT[1990] 183 ITR 1/ 49 Taxman 87 (SC) and CIT v. O.M.S.S. Sankaralinga Nadar & Co. [1984] 147 ITR 332/[1983] 15 Taxman 239 (Mad.). U.S. Awasthi for the Applicant. JUDGMENT Gulati, J.-In compliance with the direction of this Court, the Tribunal has referred the following question of law for the opinion of this Court: "Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that only the net amount of interest paid to a partner after deducting the interest paid by him could be added to the firm's income under section 40(b) of the Income-tax Act, 1961?" 2. The assessee is a registered firm which derives income from the financing of vehicles on hire purchase system. The dispute pertains to the assessment year 1973-74 for which the relevant previous year ended on 31-3-1972. As against the returned income of Rs. 91,800 the assessment was completed on Rs.…

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