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Issues: Whether the interest paid by a firm to the Hindu undivided family represented by its karta is deductible u/s 40(b) of the Income-tax Act, 1961.
Summary: The Income-tax Officer disallowed the deduction claimed for interest paid to the joint family, stating that the capital account in the firm was in the name of the partner until it was changed to "family account." The Appellate Assistant Commissioner upheld this decision. However, the Tribunal noted that one of the partners represented his Hindu undivided family and that there was no requirement in the partnership deed for capital investment by partners. The family advanced money to the firm, credited to the partner's account, who was also the karta of the family. The account title was changed to the family account to comply with section 40(b) of the Act. The Tribunal found that the interest payment was made to the family, not the partner, and thus not covered by section 40(b). The Tribunal distinguished previous cases where the capital accounts represented actual partner investments, unlike in this case where the money belonged to the joint family. The transfer to the family account was to reflect the true ownership and not to evade tax provisions. As the investment was always from the family, the question referred does not apply. The case differs from previous judgments cited by the revenue. Based on these findings, the court concluded that no legal question arises. The income-tax case was dismissed without costs.
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