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Issues involved: Interpretation of section 40(b) of the Income-tax Act regarding disallowance of interest credited to an individual account.
Summary: The High Court of Andhra Pradesh considered a reference made by the Appellate Tribunal regarding the disallowance of interest credited to 'Shri Terla Veeraiah Individual Account' under section 40(b) of the Income-tax Act, 1961. The case involved the assessment of M/s. Terla Veeraiah for the year 1972-73, following a partition in a Hindu Undivided Family (HUF) engaged in a wholesale cloth business. The dispute arose from the treatment of interest income received by Terla Veeraiah in his individual capacity versus as a partner in the HUF. The Income Tax Officer (ITO) disallowed the interest under section 40(b), based on previous assessments. The Appellate Tribunal upheld this decision, considering the interest credited to both the individual and HUF accounts. The Tribunal concluded that section 40(b) applied as the interest was paid to Terla Veeraiah in his capacity as the HUF's karta. However, the High Court disagreed with this interpretation. The Court noted that Terla Veeraiah maintained separate accounts for the HUF and individual transactions. The Tribunal's finding that the interest was credited to the partner in both accounts was deemed erroneous. The Court distinguished previous cases where interest was transferred between accounts, emphasizing that in this instance, separate accounts were maintained from the beginning. Referring to relevant case law, the Court highlighted that interest realized by a joint family on capital does not fall under section 40(b). Ultimately, the Court ruled in favor of the assessee, stating that the interest paid to Terla Veeraiah's individual account was not subject to disallowance under section 40(b). Therefore, the Court answered the question in the negative, in favor of the assessee, with costs and advocate's fee specified.
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