1986 (12) TMI 23 - HC - Income Tax

Summary

Issues involved: Interpretation of section 40(b) of the Income-tax Act regarding the treatment of interest paid to a partner in a firm.

Summary:
The case involved a dispute over whether interest paid to a partner, Shri Hari Nath, on his interest earning deposit account should be considered under section 40(b) of the Income-tax Act, 1961. The Income-tax Officer had added these interest amounts to the total income of the assessee-firm, leading to an appeal. The Appellate Assistant Commissioner upheld the addition, citing a Delhi High Court decision. However, the Income-tax Appellate Tribunal allowed the appeal, stating that the interest paid to a partner in respect of his individual accounts was not covered by section 40(b). This led to a reference being made to the High Court.

There was a divergence of judicial opinion on whether interest paid to a partner, regardless of the capacity in which the payment is made, is allowable under section 40(b). The High Court referred to various decisions, including CIT v. London Machinery Co. and CIT v. Brijmohan Das Laxman Das, to support the view that any payment of interest to a partner is the criterion for section 40(b) without distinction of the character or capacity in which the payment is made.

The High Court held that the interest paid to Shri Hari Nath on his interest earning deposit account was indeed covered by section 40(b) of the Income-tax Act, 1961. The Court emphasized the binding nature of precedents and rejected the suggestion for a larger Bench decision. Ultimately, the reference was decided in favor of the Revenue and against the assessee.

In a separate opinion, Justice Om Prakash concurred with the decision, highlighting the challenges of varying interpretations of Central statutes by different High Courts and suggesting the need for achieving unanimity through Supreme Court intervention.

Overall, the High Court ruled in favor of the Revenue, upholding the application of section 40(b) to the interest paid to the partner, Shri Hari Nath, on his interest earning deposit account.