Interest on partners' current accounts is deductible only when the partnership deed expressly authorises the payment.

Interest paid to partners on their current accounts is deductible only where the partnership deed expressly authorises such payment and the statutory conditions are satisfied. A deed that refers only to interest on partners' capital contribution does not permit deduction of interest on current account balances under section 40(b)(iv), even if the firm paid the amount, recorded it in its books, and the partners reported it in their returns. Compliance depends on the deed's specific terms, not on accounting treatment or tax payment by the partners.

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Issues: Whether interest paid to partners on their current accounts was allowable as a deduction under section 40(b)(iv) of the Income-tax Act, 1961, when the partnership deed did not specifically authorise such payment.

Analysis: The assessment year was 1993-94. The partnership deed referred only to payment of 18% interest on partners' capital contribution. The claim related to interest on current accounts, but there was no express authorisation in the deed for such payment. The fact that the firm had paid the interest, recorded it in its books, and the partners had included it in their returns and paid tax did not satisfy the statutory requirement. Deduction under section 40(b)(iv) could be claimed only in accordance with the deed and the statutory condition.

Conclusion: The claim for deduction of interest on partners' current accounts was not allowable and the decision was against the assessee.

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