Section 40(b) does not cover interest paid to a partner's HUF where the partner joined the firm individually, preserving the deduction.

Section 40(b) disallows interest paid to a partner of the firm, but that bar does not extend to interest credited in the separate accounts of a partner's Hindu undivided family where the partner entered the firm in an individual capacity. A Hindu undivided family is a distinct entity, and interest paid to it is not treated as payment to the partner for this purpose. The Revenue's reliance on authority involving representative capacity was held inapplicable, and the addition was deleted in favour of the assessee.

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Issues: Whether interest paid by a firm to the Hindu undivided families of partners, who had joined the firm in their individual capacity, was liable to be disallowed under section 40(b) of the Income-tax Act, 1961.

Analysis: Section 40(b) applies to interest paid to a partner of the firm. The partners concerned had joined the firm individually, and the interest paid in their individual accounts had already been brought within the mischief of the provision. The interest paid in the separate accounts of their Hindu undivided families stood on a different footing, because the Hindu undivided family is a distinct entity and is not the same as a partner who enters the firm in an individual capacity. The reasoned view supporting this distinction was accepted, and the contrary reliance placed by the Revenue on authority dealing with representative capacity was treated as inapplicable.

Conclusion: Interest paid to the Hindu undivided families was not disallowable under section 40(b), and the deletion of the addition was upheld in favour of the assessee.

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