Deduction u/s 40B. - Income Tax - 1657/CBDT

INSTRUCTION NO. 1657/CBDT Dated: October 30, 1985 The Board had vide circular No.38D(F.No.9/55/64-ITA I) dated 8-11-65 decided that the interest received by a firm from its partners should be assessed as the income of the firm. It was also decided that where a firm pays interest and receives interest from the same partner only the net interest can be stated to have been received or paid by the firm and only this amount can be considered for the purpose of assessment or disallowance u/s.40(b) of the I.T.Act. Subsequently the board issued departmental instructions No.822(F.No, 228/13/75-ITA II) dated 25-9-1975 which were diametrically opposed to the public circular No.33D. Under these instructions, the board decided that the gross amount of interest paid to the partner and not the net interest should be added back to the income of the firm. The legal position has been made explicit by the amendment in section 40(b) brought about by the Taxation Laws. The inconsistency in the departmental instructions and the public circular has been adversely commented upon by the courts of law. It has therefore been decided that in all such cases where interest is paid by a firm to a partner who has also paid interest to the firm, the amount of interest to be disallowed u/s.40(b) will be limited to the net amount of interest paid by the firm to the partner that is the amount by which the interest paid by the firm to the partner exceeds the interest paid by the partner to the firm. The instruction No.882(F.No.228/13/75-ITA II) dated 25-9-1975 stands superseded with immediate effect. The above instructions will apply to all pending assessments. Completed assessments need not be disturbed. These instructions may be brought to the notice of all the officers working in your charge.