Retrospective Explanation to Section 40(b) kept interest on a partner's personal loan outside disallowance.

Explanation 2 to section 40(b), inserted by the Taxation Laws (Amendment) Act, 1984, was treated as retrospective because it was explanatory in nature. On that footing, interest paid by a firm to an individual partner in his personal capacity was outside the disallowance under section 40(b) where the partner was admitted only in a representative capacity and the payment did not arise from that representative relationship. The interest on the personal loan therefore could not be disallowed as a partner-related payment, and it was not includible in the firm's income.

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Issues: Whether interest paid by the firm on a loan advanced by an individual partner in his personal capacity, while he was a partner only in a representative capacity, was disallowable under section 40(b) of the Income-tax Act, 1961.

Analysis: Explanation 2 inserted in section 40(b) by the Taxation Laws (Amendment) Act, 1984 was treated as an explanatory provision and hence applicable retrospectively to the assessment year in appeal. On that basis, interest paid by the firm to the individual otherwise than as partner in a representative capacity could not be brought within the disallowance contemplated by section 40(b). The factual position was that the interest related to a personal loan advanced by the partner and was not interest on a transaction falling within the representative capacity in which he was admitted to the firm.

Conclusion: The disallowance under section 40(b) was not sustainable and the interest amount could not be added to the income of the firm.

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