1981 (7) TMI 110 - AT - Income Tax

Summary

Issues:
1. Disallowance of interest paid to HUFs of partners under section 40(b) of the Income Tax Act, 1961.
2. Addition of salary paid to partners without considering reasonableness under section 40A(2) of the Act.

Analysis:

Issue 1: Disallowance of interest paid to HUFs under section 40(b):
The case involved two second appeals challenging the orders passed by the AAC in relation to the assessment years 1975-76 and 1976-77. The firm, constituted of three partners, had interest paid to the HUFs of the partners disallowed by the ITO under section 40(b) of the Act. The AAC upheld this disallowance, considering the interest paid to HUFs as part of the firm's income. However, the Tribunal disagreed with this approach, citing precedents and the interpretation of the law. The Tribunal held that interest paid to the HUFs of partners cannot be considered as paid to the partners themselves for the purpose of disallowance under section 40(b). It was established that while a Karta of an HUF may be a partner in a firm, the HUF entity itself cannot be a partner. Therefore, the Tribunal concluded that the disallowance of Rs. 8,718 and Rs. 6,175 in the respective years should be deleted from the firm's assessment.

Issue 2: Addition of salary to partners under section 40A(2):
The second issue pertained to the addition of Rs. 18,000 as salary paid to the partners without considering whether the expenditure was excessive or unreasonable under section 40A(2) of the Act. The Tribunal referenced a previous order in the assessee's case for the assessment year 1974-75 and rejected the addition based on the arguments presented in that order. By aligning with the previous decision, the Tribunal rejected the addition of Rs. 18,000 in each of the two years. Consequently, the appeals were partly allowed based on the findings related to both issues.

In conclusion, the Tribunal ruled in favor of the appellant, primarily on the grounds that interest paid to the HUFs of partners cannot be equated to payments made to the partners themselves for the purpose of disallowance under section 40(b) of the Income Tax Act, 1961. Additionally, the Tribunal rejected the addition of salary paid to partners in the absence of a determination of excessiveness or unreasonableness under section 40A(2).