Law: Income Tax Act, 1961

Section: 40,40b

(a) Income-tax----Firm---Business expenditure---Disallowance---Net interest paid by firm to partner to be considered for disallowance---Indian Income Tax Act, 1961, S.40(b). The assessee was a firm carrying on textile business. A sum of Rs.11,859 was the interest payment made by the assessee, out of which Rs.2,296 represented interest allowed to a partner and the sum of Rs.9,063 was' the interest paid on loan obtained by the partner from the Egmore Benefit Society for the purpose of the assessee's business on the security of his personal property. The Income-tax Officer held that for the purposes of application of section 40(b) of the Income Tax Act, 1961, only the gross interest should be taken and not the net interest. The Tribunal restricted the disallowance to Rs.4,369. On a reference, Held, (i) that the Tribunal was justified in holding that for the purpose of disallowance under section 40(b) only the net interest should be taken into account and not gross interest. Keshvaji Ravji & Co. v. CIT (1990) 183 ITR 1(SC) fol. (ii) That since the amount to be disallowed was restricted to Rs.4,369 by the Tribunal, it was not necessary to consider the question whether the interest paid by the firm to the partner was really the interest paid to Egmore Benefit Society. The issue raised in the second question was purely academic in so far as this tax case was concerned could not be answered. (b) Income-tax--- ----Reference---Academic questions cannot be answered---Indian Income Tax Act, 1961, S.256. THIS JUDGMENT DELIVERED BY N.V. BALASUBRAMANIAN, J--- In pursuance of the directions of this Court in T.C.P. Nos. 693 and 694 of 1985, dated November 25, 1984, the Appellate Tribunal has stated a case and referred the following questions of law for our consideration:-- "(1) Whether, on the facts and in the circumstances of the case, the Tribunal is justified in holding that for the purpose of disallowance under section 40(b) only net interest should be taken into account and not gross interest. (2) Whether; on the facts and in the circumstances of the case, the Tribunal is justified in holding that the sum of Rs.9,063 being the interest paid by the assessee-firm to Shri…

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