Section 40(b) disallowance failed where firm's interest payments were treated as made to Hindu undivided families, not partners.

Interest credited by a firm on capital standing in the names of the partners' Hindu undivided families was held not to fall within the section 40(b) disallowance bar on the facts stated. The Tribunal treated the capital as belonging in substance to the Hindu undivided families, noting that the partners were under no obligation to contribute capital and that the transfers followed a partial partition accepted by the tax authority. Because the interest was effectively paid to the Hindu undivided families, and not to the individual partners, the statutory prohibition was not attracted. The question was answered in the negative and in favour of the assessee.

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Issues: Whether interest paid by a firm on capital standing in the names of the partners' Hindu undivided families could be disallowed under section 40(b) of the Income-tax Act, 1961.

Analysis: The capital accounts for the relevant assessment years stood in the names of the Hindu undivided families, and the interest was credited accordingly. The Tribunal found that the partners were not under any obligation to contribute capital, that the transfer to the Hindu undivided family accounts followed a partial partition accepted by the Income-tax Officer, and that the interest was in substance paid to the Hindu undivided families and not to the individual partners. On those facts, the statutory bar in section 40(b) was not attracted.

Conclusion: The interest could not be disallowed under section 40(b); the question was answered in the negative and in favour of the assessee.

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