Partner interest deduction under section 40(b)(iv) cannot be cut down by forcing unclaimed depreciation into firm profits.

Interest paid to partners under section 40(b)(iv) is not subject to a prior recomputation of firm profits by forcing depreciation that was not claimed in the accounts. The statutory scheme distinguishes partner remuneration, which is expressly linked to book profit, from partner interest, for which no comparable mandate exists. On that basis, depreciation could not be insisted on merely to recast the partners' capital accounts or reduce the allowable interest, and the accounts could not be rejected on that ground.

---

---

Issues: Whether, for deduction of interest paid to partners under section 40(b)(iv), the Assessing Officer could first recompute the firm's profits by deducting depreciation not claimed in the accounts and thereby rewrite the partners' capital accounts.

Analysis: The statutory scheme draws a clear distinction between interest paid to partners under clause (iv) and remuneration under clause (v) of section 40(b). While clause (v) expressly links partner remuneration to book profit and Explanation 3 defines book profit as net profit computed in the prescribed manner, clause (iv) contains no corresponding requirement that depreciation must first be worked out before interest is credited to the partners' capital accounts. The absence of an express statutory mandate, coupled with the principle that depreciation cannot be forced on an assessee when not claimed in the relevant years, meant that the Revenue could not insist on prior deduction of depreciation merely to reduce the interest allowable under clause (iv). The accounts could not be rejected on that basis.

Conclusion: The depreciation had not to be deducted first for the purpose of computing interest payable to partners under section 40(b)(iv), and the assessee succeeded.

Ratio Decidendi: Where the statute specifically links one partner-related deduction to book profit but omits such linkage for interest under section 40(b)(iv), depreciation cannot be compelled to be deducted beforehand to recast the partners' capital balances or curtail the allowable interest.

---