1994 (1) TMI 122 - AT - Income Tax

Summary

Issues:
1. Allowability of salary and interest paid to partners under section 40(b).
2. Addition of unexplained cash credit under section 68.

Analysis:

Issue 1: Allowability of salary and interest paid to partners under section 40(b)

The appeals by the Revenue pertain to the assessment years 1980-81 and 1981-82 concerning the deduction of salary and interest paid to partners of the firm under section 40(b). The Assessing Officer disallowed the claims, but the first appellate authority allowed the deductions, stating that partners represented their HUFs as 'Karta' and the interest was allowable as partners had invested individual money. The Departmental Representative argued that the deductions were not in accordance with section 40(b). The counsel cited a High Court decision supporting the deduction of interest paid to partners lending money to the firm. However, regarding salary, there was no direct decision from the jurisdictional High Court. The Tribunal, in a previous case, declined to allow salary as a deduction, leading to the current decision where interest was held allowable, but salary was not deductible under section 40(b).

Issue 2: Addition of unexplained cash credit under section 68

In the appeal for the assessment year 1980-81, the addition of Rs. 23,000 on account of unexplained cash credit was contested. The Assessing Officer noted a cash credit in the name of a specific entity in the books of the assessee, leading to assessment under section 68. The first appellate authority accepted the claim after considering the nature of transactions and an affidavit filed by the assessee. The Departmental Representative argued that the affidavit was filed late, relying on a Supreme Court decision emphasizing the need for verification of self-serving recitals. The counsel contended that the transactions were genuine, supported by detailed entries in the books, and the onus shifted to the Department after filing the affidavit. The Tribunal found that the cash credit was genuine based on the evidence provided by the assessee, concluding that the entry was duly proved in favor of the assessee, and thus, the ground did not succeed.

In conclusion, both appeals were partly allowed, with interest being held allowable but salary not deductible under section 40(b), and the addition of unexplained cash credit under section 68 was not upheld.