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TMI Blog1984 (12) TMI 151X X X X Extracts X X X X X X X X Extracts X X X X ..... cts in this regard, the rival submissions and our conclusion thereon, are discussed hereunder. The assessee, a partnership firm, paid interest amounting in all to Rs. 37,548 to its partners. It had also received interest from two of its partners, namely, Shri V.R. Shah and Shri H.S. Shah, of Rs. 1,825 and Rs. 5,838, respectively, on the amounts borrowed by them from the firm. The position of interest paid to and received from these two partners is as under : Name of the Interest Interest Net paid Net received partner paid received Rs. Rs. Rs. Rs. Shri V.R. Shah 4,880 1,825 3,055 --- Shri H.S. Shah 1,952 5,838 --- 3,886 There was no receipt of interest from any other partners. The ITO, while disallowing the interest paid to the partner ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2. The Commissioner (Appeals) held that the Allahabad High Court, while deciding the case of Kailash Motors, misread the earlier decisions of the same High Court in Sri Ram Mahadeo Prasad v. CIT [1953] 24 ITR 176 and Sri Ram Mahadeo Prasad v. CIT [1979] 120 ITR 149 and came to the conclusion that " only the net amount of interest paid by the firm to its partner, after adjusting the interest paid by the partner to the firm, could be disallowed under section 40(b) " while, however, purporting to follow the rationale of the earlier mentioned decisions. He was of the opinion, that in the earlier mentioned two decisions, there was a categorical finding by the High Court that only the gross amount of interest should be disallowed without making a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nts brought by him from his HUF or from his individual funds is in either case payment of, interest to the partner and both these kinds of payments are within the purview of section 40(b) and hence are inadmissible as deduction, but in view of the decision of this Court in Sri Ram Mahadeo Prasad the net amount paid by the firm to its partners alone is disallowable. In view of these decisions, we answer the question referred to us in the affirmative, in favour of the assessee and against the department. . ." After referring to the above decisions in Sri Ram Mahadeo Prasad v. CIT [1953] 24 ITR 176 and Sri Ram Mahadeo Prasad v. CIT [1979] 120 ITR 149, the Commissioner (Appeals) was of the opinion that in Kailash Motors' case, the Allahabad Hi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... section 10 of the Taxation Laws (Amendment) Act, 1984 has inserted an Explanation in section 40 with effect from the assessment year 1985-86, to provide for the disallowance of only the net amount of interest paid to the partner after adjustment of interest received from him and, therefore, the position in this regard prior to the amendment, was by implication, to the contrary, namely, the gross amount of interest should be disallowed. 6. We have carefully considered the rival submissions, we are of the opinion that there is overwhelming authority in support of the view that only the net amount of interest should be disallowed under section 40(b) and not the gross amount of interest. Kailash Motors' case is directly on the subject and the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ving made this adjustment they disallowed all interest paid by the partnership to such a partner by reason of the provisions of section 10(2)(iii) and 10(4)(b) quoted above, while in the case of a partner, who had borrowed more than he had lent, the excess amount paid as interest was treated as profits." From the above observations, it is quite evident, that even in Sri Ram Mahadeo Prasad v. CIT [1953] 24 ITR 176, the issue was exactly identical as one decided in Kailash Motors' case and the one before us. The finding of the High Court in Sri Ram Mahadeo Prasad v. CIT [1953] 24 ITR 176 is quite categorical that the net amount of interest paid to the partners should be disallowed and if the net amount happens to be a payment by the partners ..... X X X X Extracts X X X X X X X X Extracts X X X X
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