Law: Income Tax Act, 1961

Section: 40

Income-tax----Business expenditure---Amounts not deductible---Firm---Interest paid to partner---Claim that transactions carried out through partner's Bank account and that interest actually paid to Bank---No material to support claim--­Disallowance justified---Indian Income Tax Act, 1961, S.40(b). In respect of an interest payment made by the assessee-firm to its partner, P, the assessee claimed that section 40(b) of the Income Tax Act, 1961, was not applicable, on the ground that P had originally been conducting the business, that the bank account was in his name, that after the individual business was converted into a partnership firm, the firm had no bank account, that all the transactions were done through P, that P used to borrow amounts from the bank and advance the same to the partnership firm, that similarly, interest payments made by the firm were handed over to P, who acted as a conduit between the bank and the firm. The Tribunal held that the interest paid on the borrowed amount really reached the bank and the interest was not paid to P, and, therefore, section 40(b) had no application to the facts. On a reference: Held, that the assessee-firm made an interest payment of Rs.75,439 to its partner P. Whether the amounts were borrowed from the bank through P since the partnership firm had no bank account, whether the interest payment made to P by the partnership firm was really meant for interest payment to the bank, and whether the amounts was borrowed for business purposes, as claimed by the assessee, were all facts which were to be established by producing evidence. In the books of account maintained by the partnership firm, there was no mention of the amount borrowed from the bank. There was also no mention of the interest payment made to the bank. According to the accounts of the firm, the amounts were received from the partner P and the interest payment was also made to him. There was no link between the amount borrowed by the firm and the amount advanced by the bank. P also had no evidence to substantiate his plea that after he borrowed the amount from the bank, he advanced the same to the firm. Therefore, in the absence of any evidence on record…

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