Disallowance in the case of a firm, of any payment of interest to any partner. - Income Tax - 997/CBDT

INSTRUCTION NO. 997/CBDT Dated : August 12, 1976 Section(s) Referred: 40(b) Statute: Income - Tax Act, 1961 Section 40(b) of the Income-tax Act, 1961 provides inter alia, for disallowance in the case of a firm, of any payment of interest to any partner of the firm. 2. The Board have examined the question as to what treatment should be accorded to interest paid by the firm to a partner in the following circumstances:- (a) Where interest is paid to a HUF, and not to a partner in whatever capacity. (b) Where interest is paid to a partner whether as representing HUF or in his individual capacity. 3. In the former case, since the payment of interest is to the HUF, it cannot be disallowed. In such a case section 40(b) will not apply. 4. In the latter case, the position is, however, different. A HUF cannot itself enter into partnership, though it can do so through its Karta or any other member. As far as the firm is concerned, it does not recognise the representative capacity of any partner, and a person shown as a partner is a partner for all purposes. If a partner represents his HUF, and earns interest on his account with the firm, such interest will have to be disallowed in computing the income of the firm. This is because u/s 40(b) the prohibition is absolute and the section makes no distinction between payments by way of interst, commission, salary, bonus, or remuneration made to a partner as a partner and such payment made to him in a different capacity. This view is supported by the following High Court decisions:- 1. M/s. Ratnaswamy Nadar Vs. CIT (1965) 58 ITR 312 (Madras). 2. M/s. Girdhari Lal Ghassi Ram Vs. CIT (1968) 69 ITR 890 (Calcutta). 3. M/s. Panna Lal Girdhari Lal Vs. CIT (1971) 81 ITR 629 (Delhi).