Section 40(b) disallowance applies to interest credited to partners representing Hindu undivided families, even in individual accounts.

Interest paid by a firm to credit balances in the individual accounts of partners representing their Hindu undivided families was held to fall within section 40(b) of the Income-tax Act, 1961, because a karta does not acquire a separate taxable personality for this purpose. The provision bars deduction of interest and similar payments to any partner to prevent profits being siphoned off in another form, and that character is not changed merely because the amount is credited in an individual account. The interest was therefore not deductible and was liable to disallowance.

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Issues: Whether interest paid by a firm to credit balances standing in the individual accounts of partners, who represented their Hindu undivided families, was deductible or was hit by section 40(b) of the Income-tax Act, 1961.

Analysis: Section 40(b) prohibits deduction of interest, salary, bonus, commission or remuneration paid by a firm to any partner. The provision is intended to prevent partners from siphoning off firm profits in the guise of such payments. Where a karta joins a firm representing a Hindu undivided family, he does not acquire a distinct and separate personality from the family for purposes of the provision, and amounts credited in his individual account cannot be treated as separate from payments to the partner.

Conclusion: The interest payments were not allowable as deductions and were liable to disallowance under section 40(b). The answer to the referred question was given against the assessee and in favour of the Revenue.

Ratio Decidendi: For the purposes of section 40(b) of the Income-tax Act, 1961, a partner acting as karta of a Hindu undivided family is not a separate taxable personality, and interest paid by the firm to him or to his credit cannot escape disallowance merely because the amount stands in an individual account.

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