Net partner interest governs section 40(b) disallowance, not gross ledger entries split between separate accounts.

For disallowance under section 40(b) of the Income-tax Act, interest attributable to a partner is to be computed on the net amount actually payable, not on gross figures split across separate ledger accounts. Where a partner has both interest credited on funds lent to the firm and interest debited on borrowings from the firm, the substantive tax effect depends on the net interest balance. The accounting presentation cannot change that substance, and the CBDT circular recognised the same approach. On that basis, the disallowance was confined to the net interest amount rather than the gross sum.

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Issues: Whether, for the purpose of disallowance under section 40(b) of the Income-tax Act, 1961, the interest attributable to a partner should be computed on the gross amounts shown in separate accounts or on the net interest balance actually payable.

Analysis: The assessee's partner maintained two accounts in the firm's books, one showing interest credited on money lent to the firm and the other showing interest debited on money borrowed from the firm. The court accepted the view that the tax consequence under section 40(b) depends on the actual net amount of interest paid to each partner, and not on the manner in which the entries are split in the books. The circular instruction of the Central Board of Direct Taxes had already accepted this approach, and the accounting method adopted by the assessee could not alter the substantive position.

Conclusion: The disallowance had to be restricted to the net interest of Rs. 2,181, and not the gross amount of Rs. 6,954; the question was answered in the affirmative and against the Revenue.

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