1990 (2) TMI 27 - HC - Income Tax

Partnership firm cannot adjust interest received from partners against interest paid for taxable income

Commissioner Of Income-Tax Versus Eastern India Agencies

The High Court of Patna held that under section 40(b) of the Income-tax Act, a partnership firm cannot adjust interest received from partners against ... Business Expenditure, Firm Issues:Interpretation of section 40(b) of the Income-tax Act, 1961 regarding the treatment of interest received and paid by a partnership firm.Analysis:The High Court of Patna was presented with a reference under section 256(1) of the Income-tax Act, 1961, by the Income-tax Appellate Tribunal, 'B' Bench, Patna. The question referred was whether the assessee, a partnership firm, is entitled to adjust the interest received from the firm against the interest paid to the firm, with only the net amount of interest to be added back under section 40(b) of the Act in computing the firm's total income. The assessee contended that the interest paid should be reduced by the interest received from partners, while the Revenue argued that the entire interest paid should be included in the firm's income as per section 40(b.The Income-tax Officer initially rejected the assessee's contention and included the full amount of interest paid to partners in the firm's income. The Appellate Assistant Commissioner upheld this decision, leading the assessee to appeal to the Tribunal. The Tribunal sided with the assessee, allowing the appeal based on the argument that only the net interest should be considered. However, the Revenue challenged this decision, leading to the reference to the High Court.The Revenue argued that as per section 40(b) of the Act, any interest payment made by a firm to a partner cannot be deducted in computing the firm's taxable income. Citing precedent, the Revenue contended that the gross amount of interest paid should be considered without adjustment for interest received from partners. The High Court agreed with this interpretation, emphasizing that the disallowance under section 40(b) pertains to the gross interest payment without adjustment for interest received.Ultimately, the High Court held that the Tribunal erred in allowing the adjustment of interest received against interest paid by the firm. The reference was answered in favor of the Revenue, directing that the entire interest paid to partners should be included in the firm's income. As the assessee did not appear, each party was ordered to bear their own costs for the reference.