1986 (9) TMI 133 - AT - Income Tax

Rectification Of Mistakes, Apparent From Record, Business Disallowance, Salary Paid To Partners

Summary

Issues:
1. Disallowance of interest paid to a partner of the firm under section 40(b) of the Income-tax Act, 1961.

Analysis:
The appeals before the Appellate Tribunal ITAT Hyderabad-B involved the disallowance of interest paid to a partner of a firm under section 40(b) of the Income-tax Act, 1961 for the assessment years 1979-80 and 1980-81. The assessee, a registered firm of three partners engaged in pawn-broking and money-lending, had added back the interest amounts debited to the partners in their returns. However, discrepancies were noted regarding the interest paid to one of the partners, Shri Shantilal, and a notice was issued under section 154 of the Act for rectification. The Income Tax Officer (ITO) ordered the addition of the interest amount under section 40(b), resulting in an increased total income for the firm.

The assessee appealed this decision before the AAC, Range-A, Vijayawada, consolidating the appeals for the relevant years. The AAC upheld the disallowance of interest, stating that the payment made to a partner's sole proprietary concern still falls under the purview of section 40(b). The AAC dismissed the appeal, emphasizing that any interest paid to a partner, regardless of the recipient entity, is subject to disallowance under the Act.

The Appellate Tribunal considered various legal precedents and interpretations of section 40(b) in its analysis. It highlighted that the interest payment must be made from the firm's income and that the distinction between different types of investments by partners does not affect the disallowance under section 40(b. The Tribunal also noted that if a partner is not obligated to bring in specific assets to the firm, section 40(b) may not apply, but this exception did not apply in the present case.

Ultimately, the Tribunal held that the interest paid to Shri Shantilal's proprietary concern was tantamount to paying interest to the partner himself, thus falling within the scope of section 40(b). It concluded that the additions made by the ITO were valid, dismissing the appeals filed by the assessee for both assessment years. The Tribunal found no merit in the appeals and upheld the disallowance of interest under section 40(b for the relevant years.