1984 (12) TMI 151 - AT - Income Tax

Summary

Issues:
1. Disallowance of interest paid to partners under section 40(b) of the Income-tax Act.
2. Interpretation of section 40(b) regarding the deduction of interest paid to partners by the firm.
3. Application of the principle of adjusting interest received from partners against interest paid to them in disallowance under section 40(b).

Analysis:

The case involved an appeal by the assessee against the order of the Commissioner (Appeals) disallowing the gross amount of interest paid to the partners by the firm under section 40(b) of the Income-tax Act, 1961. The dispute centered around whether the net amount of interest after adjustment of interest received from partners should be disallowed or the gross amount of interest paid. The firm had paid interest to partners totaling Rs. 37,548 and received interest from two partners, Shri V.R. Shah and Shri H.S. Shah. The Income Tax Officer disallowed the entire interest paid without adjusting the interest received from these partners.

Upon appeal, the Commissioner (Appeals) rejected the assessee's claim based on the decision of the Allahabad High Court in CIT v. Kailash Motors. The Commissioner held that only the gross amount of interest paid to partners should be disallowed under section 40(b), without making any adjustment for interest received from them. The assessee contended that the net amount of interest paid after adjusting interest received should be disallowed, citing Kailash Motors' case as authority for this proposition.

The Appellate Tribunal, after considering the arguments, held that overwhelming authority supported the view that only the net amount of interest should be disallowed under section 40(b). The Tribunal relied on the decisions of the Allahabad High Court in Sri Ram Mahadeo Prasad cases and Kailash Motors' case, which established that only the net amount of interest paid to partners should be disallowed. The Tribunal distinguished a Madhya Pradesh High Court case cited by the revenue, stating it did not directly address the issue at hand.

Consequently, the Tribunal allowed the appeal, directing that interest from individual partners should be adjusted against the interest paid to them by the firm, and only the net amount of interest paid should be disallowed under section 40(b. The relief granted to the assessee was for Rs. 3,777.