Section 40(b) interest disallowance does not apply when payment is made to a partner's Hindu undivided family account.

Section 40(b) disallowance applies only when interest is paid to a partner in the same capacity in which the partner is admitted to the firm. Interest credited to a separate Hindu undivided family account, where the individual partner was admitted only in his personal capacity, was not payment to a partner for this purpose. The later Explanations were treated as clarificatory and reflective of the pre-existing legal position. The disallowance was therefore not attracted and was rightly deleted.

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Issues: Whether interest paid by a firm to a Hindu undivided family represented by a partner in his representative capacity, where the partner was a partner only in his individual capacity, fell within the disallowance under section 40(b) of the Income-tax Act, 1961.

Analysis: The relevant assessment year was 1978-79. The partner concerned was admitted to the firm only in his individual capacity, while the interest in dispute was paid to a separate account maintained for the Hindu undivided family represented by him as karta. The governing principle applied was that the bar under section 40(b) operates only where payment of interest is made to the person in the very same capacity in which he is a partner. The Explanations inserted later were treated as clarificatory and therefore reflective of the law as it stood even before their insertion.

Conclusion: The interest paid to the Hindu undivided family was not payment to a partner within the meaning of section 40(b), and the disallowance was rightly deleted.

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