Section 40(b) disallows set-off of partner interest receipts against interest paid by a firm, leaving the payment fully non-deductible.

Section 40(b) of the Income-tax Act, 1961 bars deduction of any interest payment made by a firm to a partner while computing business income, and that prohibition operates notwithstanding sections 30 to 39. Interest received by the firm from its partners cannot be set off against interest paid to them, because the statute does not permit such counterbalancing treatment. The interest paid to partners therefore remains disallowable in full for the relevant assessment year, and the assessee's claim to reduce it by interest received from partners fails.

---

---

Issues: Whether interest received by a firm from its partners could be deducted from interest paid to the partners while applying section 40(b) of the Income-tax Act, 1961 for the assessment year 1971-72.

Analysis: Section 40(b) expressly prohibits deduction of any payment of interest made by a firm to a partner in computing business income. The provision operates notwithstanding sections 30 to 39 and admits of no set-off by treating interest received from partners as a counterbalancing item against interest paid to them. The claimed deduction was therefore inconsistent with the statutory language.

Conclusion: The question was answered in the affirmative, holding that the interest paid to partners could not be reduced by the interest received from them for the purpose of section 40(b), and the answer was against the assessee and in favour of the Revenue.

---