whether in a case where a firm has received as well as paid interest to a partner, it is the gross interest paid by the firm to the partner or the net interest (i.e. the gross interest paid by the firm to the partner minus the interest paid by the partner to the firm) will be added back under the provisions of section 40(b) of the Income-tax Act, 1961, in computing the income of the firm.
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Addition under section 40(b): gross interest paid to a partner must be added back despite reciprocal interest. The statutory prohibition in section 40(b) against deducting interest paid by a firm to a partner requires adding back the gross amount of interest paid; no statutory basis exists to adjust or net interest received from the partner, so netting is not permitted. The Board's revised instruction supersedes earlier guidance permitting netting and applies to pending assessments.
Cases where this provision is explicitly mentioned in the judgment/order text; may not be exhaustive. To view the complete list of cases mentioning this section, Click here.
Provisions expressly mentioned in the judgment/order text.
Addition under section 40(b): gross interest paid to a partner must be added back despite reciprocal interest.
The statutory prohibition in section 40(b) against deducting interest paid by a firm to a partner requires adding back the gross amount of interest paid; no statutory basis exists to adjust or net interest received from the partner, so netting is not permitted. The Board's revised instruction supersedes earlier guidance permitting netting and applies to pending assessments.
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