Section 40(b) bars deduction of interest paid to partner-representatives where payment is made in the same capacity as partnership participation.

Interest paid by a firm to partners acting as kartas of their Hindu undivided families was held inadmissible under section 40(b) because the partners received the payment in the same representative capacity in which they were partners. The exclusion in section 40(b) applies where interest is paid to a partner as partner; it does not apply only when the same person is paid in a genuinely distinct personal capacity, such as an individual lender. On the facts, no separate capacity existed, so the interest was not deductible and the Revenue's position prevailed.

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Issues: Whether interest paid by a firm on loans advanced by the partners' Hindu undivided families, where the partners acted as kartas of those families, was inadmissible under section 40(b) of the Income-tax Act, 1961.

Analysis: The assessment year was 1979-80. The partners represented their Hindu undivided families in their capacity as kartas, and the loans were advanced out of Hindu undivided family funds. The interest was paid to them in the same representative capacity in which they were partners of the firm. The governing principle was that the exclusion in section 40(b) applies when interest is paid to a partner in the same capacity as partner, while it does not apply where the payment is made to the same person in a distinct personal capacity as an individual lender. On the facts found, no such distinct capacity existed.

Conclusion: The interest payments were hit by section 40(b) and were not deductible. The Tribunal's view was incorrect and the answer to the reference was against the assessee and in favour of the Revenue.

Final Conclusion: The reference was answered by holding that the statutory bar on deduction applied to the interest payments made to the partner-representatives of the Hindu undivided families.

Ratio Decidendi: Interest paid to a partner who receives it in the same representative capacity in which he is a partner is attracted by section 40(b); the provision does not apply only where the payment is made to that person in a genuinely distinct capacity.

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