( 1. ) THIS Full Bench has been constituted for resolving the conflict in two sets of opinions by different High Courts regarding application of Section 40 (b) of the Income-tax Act in respect of payment of interest to the partner of a firm as a non-allowable or allowable deduction. In fact, there are two conflicting decisions of this court in Jalamchand Mangilal vs. CIT 138 ITR 343 and 347 and in Balchand Hashmatrai and Co. vs. CIT 161 ITR 121 which have been noticed by this Court in Sobhagmal phoolchand vs. CIT 53 CTR 387 and the matter has been referred to the larger Bench. One set of view is that irrespective of the capacity in which a person joins a partnership firm and is paid interest by the firm, Section 40 (b) is a bar to payment of interest to the partner of the firm as an allowable deduction, while the other set of view is that when the interest is paid to a partner in somewhat different capacity, the amount has to be deducted as an allowable deduction.

( 2. ) BRIEFLY fact of the present case is that reference has been made under Section 256 (1) of the Income-tax Act at the instance of Commissioner of Income-tax by the income-tax Appellate Tribunal, Nagpur Bench, to answer the following question : "whether the Tribunal was correct in allowing the assessees claim for interest paid on the credit balance in the individual account of Shri Prakashchand ?" The question arose in the assessment case of the firm M/s Narbharam Popatbhai and Sons, Raipur, for the assessment year 1977-78. Shri Prakashchand was a partner in the firm in his capacity as a karta of the joint Hindu family consisting of himself, his wife and minor son. The firm had two accounts, one in the name of the joint Hindu family and the other in the individual account of Shri Prakashchand who had deposited certain amounts with the firm. The firm paid interest on the deposit of Shri Prakashchand to the tune of rs. 18,385/- during the year under assessment and the firm claimed this amount as permissible expenditure deductible under Section 37 of the Income-tax Act. The income-tax Officer held that the amount so paid as an interest by the firm was to its partner and, therefore, in terms of Section 40 (b) of the Act this amount cannot be deducted in computing the assessees income chargeable under the head profits and gains of business or profession. This order was upheld by the Commissioner of income-tax (Appeals) but in second appeal the Income-tax Appellate Tribunal relying on certain decisions allowed the claim for interest and, therefore, this reference has been made at the instance of Revenue. Finding conflict of decisions between different High courts on this question, the matter has been referred to the Full Bench.

( 3. ) SECTIONS 30 to 39 of the Income-tax Act provide for various allowances and deductions to be made in computing the income chargeable under the head profits and gains of business or profession. Though generally these deductions are to be made for the purpose of determining the net income of any assessee, Section 40 envisages situations where some of the deductions are not to be made and some are to be made in a modified manner in the case of certain classes of assessees. Clause (b) deals with firms which reads as under :-

"notwithstanding anything to the contrary in Sections 30 to 39, the following amounts shall not be deducted in computing the income chargeable under the head "profits and gains of business or profession",. . . . (b) in the case of any firm, any payment of interest, salary, bonus, commission or remuneration made by the firm to any partner of the firm. "

This provision corresponds to Section 10 (4) (b) of the Indian Income-tax Act, 1922, with the difference being that bonus has now been added in this clause (b ). This provision was enacted to prevent siphoning off the profits in some form or other so as to reduce the tax liability and in the case of a firm, this siphoning off is envisaged by payment to a partner of a p