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Section 40(b) of the Income-tax Act, 1961 - Business disallowance - Interest/salary, etc., paid to partner - Assessment year 1973-74- Partners of assessee-firm obtained loan in their individual names from bank and amount so borrowed on very same day was transferred to assessee-firm to credit of bank loan account - Whether Tribunal was justified in holding that partners had acted as intermediaries to obtain loan for and on behalf of assessee-firm and, therefore, interest paid to bank could not be disallowed under section 40(b) - Held, yes FACTS Four partners of the assessee-firm obtained loan of Rs. 10,000 each in their individual names from a bank and the aggregate amount of Rs. 40,000 so borrowed was transferred on that very day to the assessee-firm to the credit of bank loan account. For the assessment year 1973-74, the assessee-firm claimed that such money borrowed was used for the purpose of its business and the interest paid thereon to bank should not be disallowed under section 40(b). The ITO did not accept the claim of assessee-firm. The assessee having failed in appeal before the AAC went in further appeal to the Tribunal which allowed deduction of interest paid to the bank, holding that the amount was borrowed by the assessee-firm for its business. On reference: HELD There is a clear finding of the Tribunal to the effect that it was the assessee-firm which had borrowed money from the bank through its partners. The partners had clearly acted as intermediaries or conduit pipe to obtain loan for and on behalf of the assessee-firm. The Tribunal had held that, in substance, the amount was borrowed by the assessee-firm for its business. There was no reason or justification to disturb this finding of fact recorded by the Tribunal. It, thus, became clear that the interest in question had not been paid to the partners but to the bank. Once this position became clear, the interest paid to the bank could not have been disallowed under section 40(b ). CASE REFERRED TO CIT v. Agra Tannery [1989] 179 ITR 44 (Punj. & Har.). M.J. Thakore for the Applicant. J.P. Shah for the Respondent. JUDGMENT Mankad, J. - The assessee is a partnership firm consisting of four…

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