Law: Income Tax Act, 1961

Section: 40(b)

Income-tax------Business expenditure---Amounts not deductible---Firm---Interest---Partner as Karta representing Hindu undivided family---Individual funds deposited with firm---Interest paid by firm to partner in individual capacity for periods prior to 1-4-1985- --Deductible---Indian Income Tax Act, 1961, S.40(b). Where a person is a partner in a firm as Karta representing his Hindu undivided family, interest paid to him by the firm on deposits made by him with the firm in his individual capacity, is deductible while computing the income of the firm chargeable under the head "Profits and gains of business or profession", even for periods prior to April 1, 1985, from which date Explanation 2 to section 40(b) was inserted in the Income Tax Act, 1961. Brij Mohan Das Laxman Das v. CIT (1997) 223 ITR 825 (SC) fol. Gajanand Poonam Chand & Bros. v. CIT (1988) 174 ITR 346 (Raj.) and CIT v. R.M.Chidambaram Pillai (1977) 106 ITR 292 (SC) ref. JUDGMENT K. VENKATASWAMI, J.---The question that has been referred to this Court under section 257 of the Income-tax Act, 1961 (hereinafter called "the Act"), reads as follows:- "Whether, on the facts and circumstances of the case, the assessee's claim to the benefit of clause (b) of section 40 of the Income-tax Act, 1961, has been rightly disallowed?" The assessment year in question is 1976-77. The case of the assessee-firm was that Shanti Kumar Jain, Ashok Kumar Jain, Raj Kumar Jain and Niranjan were partners in the firm in their capacity as karats of the respective Hindu undivided family. They have advanced moneys to the assessee-firm in their individual capacity. The assessee-firm paid interest to them on the investments made in their respective individual capacity. It is the further case of the assessee-firm that it has maintained two separate ledger accounts of the partners, one of individual as loan creditor and another of karta of Hindu undivided family as partners in the firm. The sources of the money, according to the assessee, are quite separate. The assessee-firm claimed that the interest paid to them shall not be included while computing the income chargeable under the head "Profits and gains of business or…

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