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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 1977-78 - Assessee-firm having HUFs as its partners borrowed money on interest from members of HUFs - Borrowed money did not belong to HUFs - Whether interest paid by assessee-firm to those members of HUFs would not be covered under section 40(b) and was, therefore, allowable as deduction - Held, yes FACTS The assessee-firm having HUFs as its partners borrowed money on interest from members of the HUFs. The amounts borrowed from these individuals did not belong to the HUFs. The assessee-firm paid interest to these members of the HUFs and claimed deduction of the same. The ITO applying upon section 40(b) disallowed the assessee's claim. On second appeal, the Tribunal, however, directed that interest paid to the partner in his individual capacity was allowable in his individual capacity when the partner represented the HUF in the assessee-firm. On reference: HELP In view of the clear language of section 40(b) there can be no doubt that amount paid as interest to a partner cannot be deducted from the income of the partnership firm. Where a person is not a partner, the interest paid is to be deducted. Even karta of a HUF can have separate funds over which family has no right. Where such family is a partner interest paid on loan taken by the firm from the separate and individual fund of the karta and not from joint family fund would not be covered under section 40(b ). Interest paid to other members of the HUF for loan taken from their individual separate fund stand on a stronger footing. However, in order to get the deduction the firm has to clearly prove the source from which loan was taken. The Assessing Officer is to take into consideration the presumptions available in general Hindu law to come to a correct conclusion for applying section 40(b). Hence, in the instant case, the interest paid by the assessee-firm to the lenders in question was allowable as a deduction. The order of the Tribunal was, therefore, upheld. CASES REFERRED TO CIT v. Khoday Eswarsa & Sons [1985] 152 ITR 423/ 20 Taxman 394 (Kar.), Chandmul Rajgarhia…

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