whether in a case where a firm has received as well as paid interest to a partner, it is the gross interest paid by the firm to the partner or the net interest (i.e. the gross interest paid by the firm to the partner minus the interest paid by the partner to the firm) will be added back under the provisions of section 40(b) of the Income-tax Act, 1961, in computing the income of the firm. - Income Tax - 882/CBDT

INSTRUCTION NO. 882/CBDT Dated : September 25, 1975 Section(s) Referred: 40(b) Statute: Income - Tax Act, 1961 A reference is invited to Board's Circular No. 33-D (XXV-24) of 1965 (F.No. 9/55/64-ITA-I dated 8-11-1965) by which Board's Circular No. 55 of 1941 on the above subject was modified. 2. The Board had occasion to re-examine the question whether in a case where a firm has received as well as paid interest to a partner, it is the gross interest paid by the firm to the partner or the net interest (i.e. the gross interest paid by the firm to the partner minus the interest paid by the partner to the firm) will be added back under the provisions of section 40(b) of the Income-tax Act, 1961, in computing the income of the firm. The Board have been advised that while there is an express provision in section 40(b) which expressly prohibits the deduction from the firm's income of any payment by way of interest made by it to a partner, there is no provision in the Act which provides for adjustment of the interest paid by the partner to the firm. In view thereof the gross amount of interest paid to the partner will have to be added back to the Income of the firm. The earlier clarification issued in the circular referred to above, to the effect that where the firm pays interest as well as receives interest from the same partner, only the net interest can be said to have been received or paid by the firm and only such net interest should be taken into consideration, is not in accordance with the provisions of the Act. 3. Necessary instructions may kindly be issued to the officers working in your charge on the lines indicated above. The above instructions will apply to all pending assessments. Completed assessments need not be disturbed.