Netting of partner interest under section 40(b) applies, leaving only any net payment disallowable after adjustment.

Interest paid by a firm to its partners under section 40(b) was to be adjusted against interest received from those partners on overdrawn accounts, so that only the net interest payment, if any, remained subject to disallowance. The Court followed the Supreme Court's approach that the mischief of section 40(b) is not attracted to the gross payment where reciprocal interest transactions eliminate any net interest outgo to partners. The answer was therefore in favour of the assessee and against the Department.

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Issues: Whether, for the purpose of disallowance under section 40(b) of the Income-tax Act, 1961, interest paid by a firm to its partners can be set off against interest received from the partners on their overdrawings, so that only the net interest, if any, remains disallowable.

Analysis: The firm carried on money-lending business and had both interest payments to partners and interest receipts from them on overdrawn accounts. The question was whether section 40(b) applied to the gross interest paid or only to the net amount after adjusting reciprocal interest transactions. The Court followed the Supreme Court's view that where the net result shows no interest payment to partners, the mischief of section 40(b) is not attracted to the gross figure in isolation.

Conclusion: The interest received from the partners was to be adjusted against the interest paid to them, and only the net interest payment, if any, was liable to be disallowed under section 40(b). The answer was therefore in favour of the assessee and against the Department.

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