Interest to partners is allowable when authorised by the deed, paid in year, and within the statutory ceiling.

Interest paid to partners was allowable where the partnership deed authorised the payment, the amount was actually paid during the year under the cash system of accounting, and the rate stayed within the statutory ceiling. The allowance under the Income-tax Act depended on deed-based authorisation and compliance with the prescribed limit, not on proof that the partners' capital was exclusively deployed for business purposes. A disallowance made only because the capital was not shown to be used solely in the business was therefore unsustainable, and the deduction was allowed.

---

---

Issues: Whether interest of Rs. 5,00,000 paid to partners, being authorised by the partnership deed and actually paid during the year under the cash system of accounting, was allowable under section 40B of the Income-tax Act, 1961.

Analysis: The allowance of interest to partners depends on authorisation by the partnership deed and compliance with the statutory ceiling, and not on whether the partners' capital was exclusively deployed for business purposes. The assessee followed the cash system of accounting and the amount was actually paid during the year. The rate of interest was within the permissible limit and the payment was in accordance with the deed. Disallowance made solely on the basis of perceived absence of business use of capital was therefore unsustainable.

Conclusion: The interest paid to partners was allowable and the disallowance was set aside, in favour of the assessee.

Ratio Decidendi: Interest paid to partners is allowable where it is authorised by the partnership deed, paid within the statutory limit, and actually incurred under the applicable method of accounting; lack of exclusive business deployment of capital is not, by itself, a ground for disallowance.

---