COMMISSIONER OF Income Tax vs MINERVA DYEING CO.

This is a reference u/s 256(1) of the Income Tax Act, 1961, at the instance of the Revenue to answer the following question of law :

"Whether, on the facts and in the circumstances of the case, the Tribunal was legally justified in holding that interest of Rs. 5,403 paid by Shri Kantilal, partner to the firm, on his debit balance was not taxable in the hands of the firm ?"

The relevant assessment year is 1978-79. During the relevant period, the assessee-firm had received Rs. 5,403 as interest from one of its partners, namely, Kantilal. The firm also had paid interest to Kantilal on the credit balance in his capital account. The assessee offered to pay tax on the difference between the two amounts which was Rs. 2,145. The Income Tax Officer, however, rejected that claim on the basis of section 40(b) of the Act. The Appellate Assistant Commissioner, however, upheld the assessees contention. The Tribunal has taken the same view. Hence, this reference at the instance the Revenue.

We have held in Commissioner of Income Tax Vs. Motilal Ramjiwan and Company, that, in such a situation, only the net amount paid by the firm to partner, after adjusting the interest paid by the partner to the partnership firm, can be disallowed u/s 40(b) of the Income Tax Act, 1961. The Tribunals view being the same, it has to be accepted.

Consequently, the reference is answered against the Revenue and in favour of the assessee by holding that the Tribunals view is justified.