Law: Income Tax Act, 1961

Section: 147,40,10(4)(b),30,31,32,33,34,35,36,37, 38,39

Section 40(b) of the Income-tax Act, 1961 - Business disallowance - Interest, salary, etc., paid by a firm to a partner - Assessment years 1969-70 and 1970-71- Assessee and his brother were partners in a firm formed after partition of HUF - Partners had two accounts, one in name of HUF and other in name of individuals - Assessee claimed that interest paid to partners on their indivi-dual accounts could not be disallowed while computing income of firm - Whether in view of decision of Apex Court in case of Brij Mohan Das Laxman Das v. CIT [1997] 223 ITR 825 / 90 Taxman 41 any interest paid to a partner who is a partner representing his HUF, on deposit of his personal/individual funds, does not fall within mischief of section 40(b) - Held, yes HELD On the basis of law, as existed prior to the Explanations were added by the Taxation Laws (Amendment) Act, 1984, the settled view was that section 40(b) absolutely prohibited the allowances of any payment by way of interest, bonus, commission or remuneration made by a firm to any of its partners. The said view, however, had undergone a sea change in the case of Brij Mohan Das Laxman Das v. CIT [1997] 223 ITR 825 / 90 Taxman 41 (SC). The Supreme Court upheld the view taken by the Rajasthan High Court in the case of Gajanand Poonam Chand v. CIT [1984] 174 ITR 346 / 39 Taxman 104. It appeared that the Supreme Court in the case of Brij Mohan Das Laxman Das (supra ) held that even for the period anterior to 1-4-1985, any interest paid to a partner, who is a partner representing his HUF on the deposit of his personal/individual funds, does not fall within the mischief of clause (b) of section 40 and agreed with the view of the Rajasthan High Court that Explanation 2, in the context of clause (b) of section 40 is declaratory in nature. [Paras 8 & 13] In the case of Suwalal Anandilal Jain v. CIT AIR 1997 SC 1279, the Supreme Court followed the same principle of law as laid down earlier in the case ofBrij Mohan Das Laxman Das (supra). [Para 14] CASES REFERRED TO A.S.K. Rathnaswamy Nadar Firm v. CIT [1965] 58 ITR 312 (Cal.) [Para 6], Girdharilal Ghasiram v. CIT [1968] 69 ITR 890 (Mad.) [Para 6], Brij Mohan Das Laxman Das v.…

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