Section 40(b) of the Income Tax Act, 1961 provides the provisions of deduction of interest on capital to the partners.

To the get the legal position clear, the following question was raised before the honorable Supreme Court:

"Whether Section 40(b) of the 1961 Act is a stand-alone section or whether it operates as a limitation to the deduction under Sections 30 to 38 of the 1961 Act?"

Honorable Supreme Court has analyzed the question in details answer as:

"Every assessee who claims deduction under Sections 30 to 38 is also requires to establish that it is not disentitled under Section 40.  It is in this respect that we have stated that the object of Section 40 is to put limitation on the amount of deduction which the assessee is entitled to under Sections 30 to 38.  In our view, Section 40 is a corollary to Sections 30 to 38 and, therefore, Section 40 is not a stand-alone section." 

For full text of judgment - visit 2008 -TMI - 3088 - Supreme Court in Income Tax Section

Section 40 limitation on deductions requires assessees to establish non-disentitlement when claiming Sections 30 to 38 benefits. Section 40 functions as a limitation on deductions otherwise allowable under the general deduction provisions and requires an assessee claiming deductions, including interest on partners' capital, to establish that the claim is not barred by the disentitlement rule; it is a corollary to the deduction framework rather than a stand-alone provision.