Section 40(b) disallowance does not cover interest on a partner's personal loan when he represents a Hindu undivided family.

Interest paid by a firm to a partner is not disallowable under section 40(b) where the partner was admitted in a representative capacity, but the money was advanced by him in his individual capacity. The controlling principle is that the disallowance rule applies to payments made to the partner in the capacity in which he represents the firm, and not to a separate personal loan transaction. On those facts, the interest payment was held outside section 40(b) and therefore allowable in the firm's computation.

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Issues: Whether interest paid by a firm to a partner, who represented a Hindu undivided family in the firm but had advanced money in his individual capacity, was liable to be disallowed under section 40(b) of the Income-tax Act, 1961.

Analysis: The assessment year was 1978-79. The partner was admitted to the firm in a representative capacity, while the loan on which interest was paid was made by him in his individual capacity. The governing principle was that section 40(b) does not require disallowance of interest paid by a firm on monies advanced by such a partner in his personal capacity, because the payment is not made to the partner in the capacity in which he represents the firm.

Conclusion: The interest amount of Rs. 10,650 was not liable to be disallowed under section 40(b); the answer to the referred question was in the negative and in favour of the assessee.

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