Section 40(b) disallowance fails where interest is credited to an estate account and beneficiaries have no present right to receive it.

Interest credited by a firm to an estate account after a partner's death was not treated as payment to a partner for section 40(b) disallowance because the estate holder had completed administration and held the amount as trustee. The minors had no present enforceable right to the income during the year, as enjoyment under the will was postponed until the youngest attained majority. On that footing, no income had accrued to the minor partners and the credited interest did not fall within payment to a partner under section 40(b).

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Issues: Whether interest credited by the firm to an estate account, after the death of a partner, constituted payment to the partners so as to attract disallowance under section 40(b) of the Income-tax Act, 1961.

Analysis: The administration of the estate had been completed and the recipient had assumed the character of a trustee. On the construction of the will, the bequest was to a class of grandsons existing at the testator's death, so future-born children had no entitlement. Although the firm had made a payment by crediting the amount to the estate account, section 40(b) applies only if the payment is to a partner. The minors had no accrued right to receive the interest during the accounting year because the will postponed enjoyment until the youngest attained majority. Following the principle that a minor with no present right to income does not derive taxable benefit, the credited interest could not be treated as payment to the partners.

Conclusion: Section 40(b) did not apply, as no income had accrued to the minor partners and the amount was not payment to a partner within the meaning of the provision.

Ratio Decidendi: Disallowance under section 40(b) requires a payment to a partner with an accrued right to receive it; where the recipient holds the amount as trustee and the beneficiary has no present enforceable right to the income, the provision is not attracted.

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