Net interest disallowance for partner interest applies under section 40(b) where reciprocal interest has been received from partners.

On a correct construction of section 40(b) of the Income-tax Act, the disallowance of partner interest is limited to the net interest after setting off interest received from the same partners, not the gross interest paid. The issue was governed by the Supreme Court ruling in Keshavji Ravji and Co. v. CIT, which treated reciprocal interest as reducing the amount liable to be added back. The question was answered in favour of the assessee.

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Issues: Whether, for the purpose of disallowance of interest to partners, only the net interest after set-off of interest received from the same partners was liable to be added back under section 40(b) of the Income-tax Act, 1961.

Analysis: The question was covered by the Supreme Court decision in Keshavji Ravji and Co. v. CIT, which held that on a correct construction of section 40(b), the amount to be disallowed is the net interest and not the gross interest paid to partners where reciprocal interest had also been received from them.

Conclusion: The question was answered in the affirmative and in favour of the assessee.

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