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Interpretation of Section 40(b) of the Income-tax Act, 1961 regarding disallowance of interest paid to a partner in his individual capacity. Analysis: The High Court of Gujarat was tasked with deciding whether the interest paid by an assessee-firm to a partner in his individual capacity could be disallowed under Section 40(b) of the Income-tax Act, 1961. This issue was previously addressed by the Full Bench of the court in Chhotalal & Co. v. CIT, which led to a series of related cases being brought before the court for resolution. The court also examined the impact of the Supreme Court's rejection of a Special Leave Petition in a previous case, emphasizing that the refusal of special leave does not automatically confirm the lower court's decision. The court highlighted that special leave is granted sparingly and only in exceptional cases involving substantial questions of law or public interest. Therefore, the rejection of special leave does not imply confirmation of the lower court's decision. The court rejected the argument that the Supreme Court's refusal to grant leave equates to confirmation of the judgment sought to be appealed against. The court emphasized the need for detailed consideration by the Supreme Court before concluding that a decision stands overruled. Ultimately, the court relied on the Full Bench's decision in Chhotalal & Co.'s case to answer the referred question in favor of the assessee and against the Revenue, indicating that the interest payment could not be disallowed under Section 40(b) of the Income-tax Act, 1961. The judgment was delivered by B. K. Mehta J., with no order as to costs.
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