1991 (2) TMI 172 - AT - Income Tax

Summary

Issues:
1. Disallowance of interest paid to a partner under section 40(b).
2. Interpretation of section 40(b) regarding interest paid to a partner in different capacities.
3. Application of Explanations 1 and 2 to section 40(b).
4. Conflict in judicial interpretations of section 40(b) by different High Courts.

Detailed Analysis:
1. The appeals concern the disallowance of interest paid to a partner, Manilal Mulji, by a firm for the assessment years 1982-83, 1983-84, and 1984-85 under section 40(b). The Assessing Officer disallowed the interest payments made to Manilal Mulji, who represented his Hindu Undivided Family (HUF) as a partner of the firm. The Commissioner (Appeals) upheld the disallowance based on previous High Court decisions. The Tribunal is now reviewing the Commissioner's decision.

2. The main contention is whether section 40(b) applies to the interest payments made by the firm to Manilal Mulji in his individual capacity, despite his representation of the HUF. The assessee argues that the capacity in which Manilal Mulji became a partner and received the interest payment differs, citing relevant High Court decisions. The Revenue, however, asserts that since the assessments predate the introduction of Explanations 1 and 2 in 1984, the Karnataka High Court's interpretation of section 40(b) should prevail.

3. The Tribunal notes that post the introduction of Explanations 1 and 2, interest paid to an individual by a firm does not fall under the prohibition of section 40(b). High Courts of Rajasthan, Madhya Pradesh, and Andhra Pradesh have deemed the Explanations clarificatory, not altering the existing law. However, conflicting interpretations exist among different High Courts, with the Karnataka High Court emphasizing the dual capacities of a partner, while other High Courts view individual partners distinct from their HUF representation.

4. The Tribunal highlights the necessity to interpret section 40(b) in line with the Karnataka High Court's precedents due to the absence of Supreme Court guidance on the matter. The introduction of Explanations 1 and 2 aimed to clarify the provision, effective from the assessment year 1985-86 onwards. As the assessments in question were prior to this amendment, the Tribunal upholds the disallowance of interest payments to Manilal Mulji in his individual capacity, as per the Karnataka High Court's interpretation.

5. Consequently, the Tribunal dismisses the appeals, affirming the disallowance of interest payments made by the firm to Manilal Mulji in his individual capacity, in compliance with the prevailing interpretation of section 40(b) by the Karnataka High Court.