1977 (12) TMI 68 - AT - Income Tax

Summary

Issues:
1. Disallowance of interest paid to HUF of a partner.
2. Interpretation of whether the interest paid was to the Karta of HUF or in his individual capacity.
3. Applicability of Board Circular on the disallowance under section 40(b).

Analysis:
The case involved the disallowance of interest paid by an assessee firm to the HUF of a partner, Shri P.T. Shah. The firm contended that the interest was paid to Shri P.T. Shah as Karta of HUF, not in his individual capacity, and thus should not be disallowed. The Income Tax Officer (ITO) disallowed the interest following a Tribunal order. The Appellate Assistant Commissioner (AAC) upheld the disallowance, stating that the HUF account was not separate from the individual account of Shri P.T. Shah. The assessee appealed against this decision.

The counsel for the assessee argued that the firm's books reflected the account in the name of Shri P.T. Shah, HUF. He highlighted that the interest paid to the HUF was included in the HUF's assessment for a subsequent year, indicating it was the HUF account. The Departmental representative contended that the amount was merely transferred from Shri P.T. Shah's individual account to the HUF, making it an individual account in reality. The applicability of the Board's Circular on the disallowance under section 40(b) was a crucial point of contention.

Upon review, the Tribunal observed that while there might have been a transfer in the past, the subsequent assessments clearly treated the account as that of the HUF. The Department had acknowledged this in the assessments for the following year. As the interest was included in the HUF's assessments and not in Shri P.T. Shah's individual assessment, it was evident that the amount belonged to the HUF. Consequently, the Tribunal held that the interest paid to Shri P.T. Shah, HUF, should not be disallowed under section 40(b) as per the Board Circular, which was applicable in this case. The Tribunal ruled in favor of the assessee, deleting the disallowed amount of Rs. 6,821.