Net interest disallowance under partnership tax rules is limited after set-off of reciprocal interest payments.

Interest received by a partnership firm from a partner should be adjusted against interest paid by the firm to that partner when applying section 40(b) of the Income-tax Act, 1961. On that principle, the disallowance is confined to the net interest payable after set-off, rather than the gross amount. The text also states that interest paid by the partner on his debit balance was not taxable in the firm's hands. The Tribunal's approach of allowing only the net disallowance was therefore affirmed as the correct treatment on the facts described.

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Issues: Whether interest paid by a partner to the partnership firm on his debit balance was taxable in the hands of the firm, and whether only the net amount of interest payable by the firm to the partner could be disallowed under section 40(b) of the Income-tax Act, 1961.

Analysis: The relevant assessment year was 1978-79. The firm had received interest from a partner and had also paid interest to the same partner on his capital account. The applicable principle was that, in such a situation, the interest disallowance under section 40(b) had to be confined to the net amount after adjusting the interest received by the firm from the partner against the interest paid to him.

Conclusion: The interest of Rs. 5,403 paid by the partner on his debit balance was not taxable in the hands of the firm, and the Tribunal was correct in allowing only the net disallowance under section 40(b).

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