Partner HUF interest payments fall outside section 40(b) disallowance when credited to HUF accounts

Interest credited by a partnership firm to the Hindu undivided family accounts of persons who were partners in their individual capacities was held outside the disallowance rule in section 40(b). The governing principle applied was that, for partnership purposes, only an individual can be a partner, so payments made to a partner's HUF do not attract the statutory bar. The existence of separate individual accounts for some partners did not change the character of the payments made to the HUF accounts. Accordingly, the interest was not disallowable under section 40(b), and the assessee's position was accepted.

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Issues: Whether interest credited to the Hindu undivided family accounts of partners in a partnership firm could be disallowed under section 40(b) of the Income-tax Act.

Analysis: The interest was paid to the HUF accounts of persons who were partners in their individual capacities. The governing principle applied was that, for partnership purposes, only an individual can be a partner and interest paid to a partner's HUF does not fall within the mischief of section 40(b). The fact that some partners also maintained separate individual accounts did not alter the character of the payments made to the HUF accounts.

Conclusion: The interest paid to the HUF accounts was not liable to disallowance under section 40(b); the assessee succeeded and the revenue's objection failed.

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