Partner interest under section 40(b): representative capacity and account nature controlled, with retrospective application of the Explanation.

Interest paid to a partner must be tested by the capacity in which the partner represents the firm and by the nature of the account to which the payment is credited. The Explanation to section 40(b) was treated as a procedural amendment and therefore retrospective from assessment year 1985-86. On the stated facts, the partner represented a Hindu undivided family in the firm, while the interest related to an individual account, so disallowance under section 40(b) was not required and the appellate deletion was upheld in favour of the assessee.

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Issues: Whether interest paid to a partner who represented a Hindu undivided family, but in respect of an individual account, was disallowable under section 40(b) of the Income-tax Act, 1961, and whether the Explanation introduced to that provision operated retrospectively as a procedural amendment.

Analysis: The allowance of interest depended on the character in which the partner stood in the firm and the nature of the account to which the payment related. The Explanation to section 40(b), applicable from assessment year 1985-86, was treated as procedural in nature and therefore retrospective. On the facts, the partner was in the firm in a representative capacity of his Hindu undivided family, while the interest was paid on an individual account.

Conclusion: The disallowance under section 40(b) was not warranted, and the deletion made by the appellate authority was upheld in favour of the assessee.

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