Income-tax-

----Firm---Business expenditure---Disallowance---Interest paid to partners-- Net interest paid to partners liable to be disallowed---Indian Income Tax Act, 1961, S.40(b).

It is the net interest paid to partners which can be added back to the income of the firm under section 40(b) of the Income Tax Act, 1961.

Keshavji Ravji & Co. v. CIT (1990) 183 ITR 1 (SC) fol.

Mr. Rajendra and R.K. Chaufla for the Commissioner.

Bishamber Lal and Ms. Geetanjali Mohan for the Assessee.

JUDGMENT

B.N. KIRPAL, J.---In respect of the assessment year 1976-77, the Income-tax Appellate Tribunal has stated the case and referred the following question of law to this Court:

"Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in upholding the order of the Commissioner of Income-tax (Appeals) directing the Income-tax Officer to add only the interest payments to partners totalling Rs.76,177 and not an amount of Rs.95,773?"

Briefly stated, the facts are that, in the relevant previous year, the assessee-firm had paid interest to its eleven partners totalling Rs.95,773. With about all these partners, the assessee had account in which money had been advanced to them and from these partners the firm had received interest. After, adjustment of the interest received by the firm from these partners, the net amount of interest paid to the partners was Rs.76,177. Proceeding under section 40(b), the Income Tax Officer disallowed the interest paid to. the partners totalling Rs.95,773.

In respect of an earlier assessment year, the Income-tax Appellate Tribunal had come to the conclusion that it is only the net interest which could be added back, namely, the sum of Rs.76,177. Following that decision, the Commissioner of Income-tax (Appeals) decided the issue in favour of the assessee and this was upheld by the Tribunal.

At the instance of the Department, the aforesaid question of law has been referred. The question now stands settled by the decision of the Supreme Court in the case of Keshavji Ravji & Co. v. CIT (1990) .183 ITR 1. In than case, on similar facts, the Supreme Court, came to the conclusion that, on a correct interpretation of section 40(b) of the Act, it will be the net interest which could be added back under section 40(b).

In view of the said decision of the Supreme Court, the question of law referred in this case is answered in the affirmative and in favour of the assessee. There will be no order as to costs.

M.BA./2404/TReference answered.