Law: Income Tax Act, 1961

Section: 40

Income-tax----Firm---Business expenditure---Disallowance of expenditure---Interest paid to partner---Law application ---Assessee partner as trustee---Personal funds deposited in firm---Interest paid on such deposits could not be disallowed in assessment year 1977-78----Explanation 2 to S.40(b) is retrospective in operation---Indian Income Tax Act, 1961, S. 40(b). Explanation 2 to section 40(b) of the Income Tax Act, 1961, in the context of clause (b) of section 40 is declaratory in nature. Therefore, even for periods anterior to April 1, 1985, with effect from which date Explanation 2 to section 40(b) was inserted, any interest paid to a partner, who is a partner representing his Hindu Undivided Family, on deposit of his personal/individual funds, does not fall within the mischief of clause (b) of section 40. Such interest would be allowable as a deduction in the computation of profits of the firm. The assessee was a firm. While computing the income for the assessment year 1977-78, the Assessing Officer added a sum of Rs.33,921 representing interest paid to E, a partner in the firm, in her capacity as a trustee, of a trust. She had deposited her personal funds in the firm and on such deposit, an amount of Rs.33,921 was paid to her by the firm as interest. The assessing authority disallowed the interest. But the Tribunal held that the interest was deductible. .On a reference: Held, that, on the facts, the Tribunal was right in law in upholding the claim of the assessee-firm, for deduction of interest paid to E. Brij Mohan Das Laxman Das v. CIT (1997) 223 ITR 825 (SC) and CIT v. S. Veeriah Reddiar (1998) 229 ITR 186 (Ker.) fol. N. T. R. Estate v. CIT (1986) 157 ITR 285 (AP) ref. JUDGMENT MRS. K. K. USHA, J.---This reference is at the instance of the Revenue from the order passed by the Income-tax Appellate Tribunal, Cochin Bench, in I.T.A. No. 197/Cock of 1987. The assessment year is 1977-78. Following is the question- referred for the opinion of this Court: "Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in upholding the claim of the assessee firm for deduction of interest paid to Smt Elsy Thomas?" The assessee is a…

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