TaxTMI 
TaxTMI 
1989 (2) TMI 85
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.... the assessee-firm. The amount was treated as loan from each of the members, according to their share, by the assessee-firm and it paid total interest amounting to Rs. 23,442 in the accounting year 1979-80, and in the assessment year 1980-81 claimed deduction of the aforesaid amount, under section 36(1)(iii) of the Income-tax Act, 1961 (for short "the Act"). The Income-tax Officer did not allow the deductions, as, in view of section 171(9) of the Act, partial partition made after December 31, 1978, had to be ignored and the interest paid was considered as having been paid to the partners either in their individual capacity or in the capacity of karta of the Hindu undivided family, which had to be disallowed by virtue of section 40(b) of th....
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....m ?" The assessee-firm has claimed deduction of the interest paid by virtue of section 36 (1)(iii) of the Act which reads as under : "36(1) ..... (iii) the amount of the interest paid in respect of capital borrowed for the purposes of the business or profession." For the applicability of the aforesaid provision, the assessee has to show that the interest paid is in respect of the capital borrowed for the purposes of business. In this case, no amount was borrowed. The three Hindu undivided families which had become partners of the assessee-firm had made business investments. On the alleged partial partition, the amount standing in the names of the Hindu undivided families through the respective kartas was divided and separately shown in t....
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....p of members of such family, immediately before such partial partition and the family shall be jointly and severally liable for tax, penalty, interest and fine, or any other sum payable under the Act. Clause (d) provides that the several liability of any member or group of members shall be computed according to the portion of the joint family property allotted to him or it at such partial partition. By no means, is the last sentence after clause (d), which is in the following terms, insignificant: "and the provisions of this Act shall apply accordingly." The aforesaid part of sub-section (9) of section 171 of the Act, to our mind, is of great significance when read with the remaining provisions of sub-section (9). This confirms that parti....
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....in terms of clause (a) of sub-section (9) of section 171 of the Act has to be considered as null and void. The necessary incident of ignoring the partial partition would be that the investment made by the three Hindu undivided families in the assessee-firm continues to be that of the Hindu undivided families and the kartas of the Hindu undivided families continue to be partners of the assessee-firm. It is nobody's case that the kartas ceased to be the partners of the firm. Therefore, even if in the books of account payment of interest is shown to have been made to the coparceners of the three Hindu undivided families, in effect, it will be taken as if interest has been paid to the kartas of the Hindu undivided families who are partners of t....