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Issues involved: Disallowance of interest payments to partners u/s 40(b) of the Income-tax Act despite their representation of Hindu undivided families (HUFs) in the partnership.
Summary: The High Court of Madras addressed the issue of disallowance of interest payments made by a registered firm to partners representing their HUFs under section 40(b) of the Income-tax Act. The court examined the contention that the interest payments should be deemed as payments to the HUFs and not to individual partners. It was argued that the partners, acting as kartas of their respective HUFs, were not ipso facto partners in the firm and that any payment made to them should be considered as payments to the HUFs. The court referred to legal precedents establishing that the karta of an HUF, when entering into a partnership, does so in their personal capacity as a partner, and any interest paid to them falls under the purview of section 40(b). In analyzing previous judgments, the court distinguished a case where interest payments were made to the legal representative of a deceased partner from a case where interest was paid to a partner representing their HUF. The court emphasized that the interest in dispute must be directly related to the partner's capacity within the partnership to determine its treatment under section 40(b). The court also examined other cases where interest payments were made by an HUF to a partnership, clarifying that such scenarios did not alter the application of section 40(b) as the HUF was considered a separate entity from the partner in the firm. Ultimately, the court upheld the disallowance of interest payments to the partners representing their HUFs under section 40(b) of the Income-tax Act. The judgment reaffirmed that payments made to partners in their personal capacity, even if they are kartas of HUFs, are subject to the provisions of section 40(b).
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