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Issues:
1. Disallowance of interest payment under section 40(b) of the Income-tax Act, 1961 to partners of the firm. 2. Interpretation and application of section 40(b) in the assessment year 1973-74. Analysis: The High Court of ALLAHABAD was presented with two questions referred by the Income-tax Appellate Tribunal regarding the disallowance of interest payments under section 40(b) of the Income-tax Act, 1961. The questions pertained to the correctness of disallowing payments made to partners of the firm, specifically Mahindra Kumar Sewati Devi and Shyam Lal Surender Kumar, for the assessment year 1973-74. The Tribunal's order dated March 30, 1979, was the basis for these questions. In the case, the assessee firm consisted of three partners, including Mahindra Kumar, Shyam Lal, and Sewati Devi. The partners were part of Hindu undivided families, and the firm had made interest payments to these families. The Assessing Officer disallowed the interest payments under section 40(b)(iv) as expenditure not allowable. The Appellate Assistant Commissioner had initially deleted the addition, a decision upheld by the Tribunal. The High Court analyzed the facts and invoked the provisions of section 40(b) to determine the correctness of the disallowance. It was established that the partners and the recipients of interest were the same Hindu undivided families. Referring to a Supreme Court observation in a similar case, the High Court held that the Assessing Officer was right in invoking section 40(b) for disallowance. The Tribunal's decision to delete the disallowance was deemed incorrect, and the High Court answered the reference in the negative, affirming the disallowance of interest payments to the partners. Therefore, the judgment concluded that the disallowance of Rs. 12,244 and Rs. 5,322 on account of interest payments to Mahindra Kumar Sewati Devi and Shyam Lal Surender Kumar, respectively, was legally justified under section 40(b) of the Income-tax Act, 1961 for the assessment year 1973-74.
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