1984 (12) TMI 163 - AT - Income Tax

Summary

Issues:
1. Disallowance of gross interest paid to partners under section 40(b) of the IT Act.
2. Interpretation of whether only the net amount of interest paid to partners should be disallowed under section 40(b) or the gross amount.
3. Comparison of decisions by different High Courts on the treatment of interest paid to partners.

Detailed Analysis:

1. The appeal involved a partnership firm contesting the disallowance of the gross amount of interest paid to partners under section 40(b) of the IT Act. The firm argued that the interest received from partners should be set off against the interest paid to them, and only the excess interest paid, if any, should be disallowed. The Income Tax Officer (ITO) disallowed the gross interest amount without adjusting the interest received from the partners.

2. The CIT(A) considered the case of each partner separately, contending that only the excess interest paid beyond the interest received should be disallowed under section 40(b). The CIT(A) referred to a decision by the Allahabad High Court, which held that only the net amount of interest paid to partners should be disallowed, after adjusting the interest received from them.

3. The appeal further discussed the conflicting decisions of different High Courts on the treatment of interest paid to partners. The CIT(A) rejected the appeal based on the interpretation of earlier decisions by the Allahabad High Court. The firm, represented by its counsel, argued that the latest decision by the Allahabad High Court supported the disallowance of only the net amount of interest paid to partners.

4. The firm's counsel cited the Allahabad High Court decision as authority for disallowing only the net amount of interest paid to partners. The Revenue, however, referred to a decision by the M.P. High Court and highlighted a recent amendment to the IT Act, suggesting that only the gross amount of interest should be disallowed.

5. The Tribunal analyzed the rival submissions and concluded 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 Allahabad High Court decisions and rejected the Revenue's argument based on the M.P. High Court decision and the amendment to the IT Act.

6. The Tribunal emphasized that the issue had already been decided by the Allahabad High Court, which held that only the net amount of interest paid to partners should be disallowed under section 40(b). The Tribunal distinguished the M.P. High Court decision, stating it did not directly address the issue at hand. Therefore, the Tribunal directed the adjustment of interest received from partners against the interest paid to them, disallowing only the net amount of interest paid under section 40(b).

7. Consequently, the Tribunal allowed relief to the firm, directing the disallowance of only the net amount of interest paid to partners, resulting in relief to the extent of Rs. 3,777. The appeal filed by the firm was allowed based on the interpretation of section 40(b) and the relevant case law.