Partner's personal loan interest was not hit by section 40(b) when the partner represented a Hindu undivided family.

Interest paid by a firm on a partner's personal loan was held not to fall within the disallowance under section 40(b) where the partner represented a Hindu undivided family in the firm. The text notes conflicting High Court views on whether the partner's representative capacity was relevant, but adopts the interpretation favourable to the assessee: the statutory bar applies only when the payment is made to the partner in that representative capacity. As the impugned interest was paid on the partner's personal borrowing and not to the Hindu undivided family through the partner, disallowance was not attracted.

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Issues: Whether interest paid by a firm on the personal loan of a partner who represented his Hindu undivided family in the firm was liable to disallowance under section 40(b) of the Income-tax Act, 1961.

Analysis: The dispute turned on whether the partner's representative capacity for the Hindu undivided family made the interest payment one made to the partner, so as to attract the statutory bar. Two High Court views were noticed: one treated the capacity of the partner as immaterial, while the other held that where the interest was paid on the partner's personal loan and not to the Hindu undivided family through its representative, section 40(b) did not apply. Faced with conflicting views, the interpretation more favourable to the assessee was preferred.

Conclusion: The interest paid on the partner's personal loan was not disallowable under section 40(b) because the partner in the firm was the Hindu undivided family and the impugned interest was not paid to that partner in its representative capacity.

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