Section 40(b) disallowance does not cover chit kasar paid to partners as chit subscribers, not as partners.

Chit kasar paid by a firm to its partners, when received by them as subscribers to the chit scheme and not in their capacity as partners, was treated as outside the scope of section 40(b) of the Income-tax Act, 1961. The payment was characterised as a rebate for participation in the chit and not as interest, salary, remuneration or commission to a partner. On that basis, the statutory disallowance did not apply and the addition of the chit kasar amount was deleted.

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Issues: Whether chit kasar paid by a firm to its partners, in their capacity as subscribers to the chits, was disallowable under section 40(b) of the Income-tax Act, 1961.

Analysis: The payments were found to have been made to the partners not as partners but as subscribers participating in the chit scheme. The amount paid was characterised as a rebate for contributing to the chit and not as interest, remuneration, salary or commission paid to a partner within the mischief of section 40(b). The reasoning was supported by the view that a payment received in a different capacity does not attract the statutory bar merely because the recipient is also a partner.

Conclusion: Section 40(b) of the Income-tax Act, 1961 was held inapplicable, and the addition of the chit kasar amount was deleted in favour of the assessee.

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