My firm pays interest on a deposit standing in the name of an AOP, and one of my partners is a member of that AOP. Is the interest disallowed as interest to a partner?
No. An association of persons is a separate person under s.2(31)(v) and a separate assessable entity, different from the firm, so interest paid by a firm to an AOP is not interest paid to a partner and is outside s.40(b). The Allahabad High Court applied the Supreme Court's reasoning in Brij Mohan Das Laxman Das, which held that interest paid to a partner who represents his Hindu undivided family, on the deposit of his own individual funds, does not fall within s.40(b).
Decided by the High Court (Not named in the report as available (Allahabad High Court)) on 2004-12-20, reported as [2005] 144 Taxman 844 (All). It bears on section 40(b), section 40(ba), section 2(31), section 2(7) of the Income Tax Act 1961, in Deductions & Disallowances and How Tax Law Is Read matters.
The point is the capacity in which money is held, and it is the mirror of the argument that has to be run under s.40(ba) when the AOP is the payer. The Court noted expressly at para 4 that s.40(ba) deals with the converse situation — an AOP paying interest or another amount to its members — so the same capacity analysis is what has to be confronted there. Practitioners planning deposits between related entities should note how thin the line is: the deposits here had been created by debiting the partners' own accounts and crediting the two AOPs on the same date the AOPs came into existence, and the disallowance still failed because the AOP was a distinct person.
Binding within that High Court's jurisdiction. Persuasive elsewhere.
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The respondent was a registered firm dealing in the wholesale purchase and sale of medicines, with seven partners each holding a one-seventh share: Jagdish Chander (HUF), Lajpat Rai (HUF), Narender Kumar, Latish Kumar, Smt Ram Piari, Smt Prem Lata and Smt Saroj Devi. The Income Tax Officer noticed on the liability side of the firm's balance sheet Rs 20,000 in the name of M/s Narender Investors Corporation (AOP) and Rs 20,000 in the name of M/s Lajpat Rai Investors Corporation (AOP). Those amounts had been transferred to the AOPs on 1 April 1976 by debiting the accounts of Jagdish Chandra, Lajpat Rai and Narendra Kumar. M/s Narendra Investors Corporation came into existence by a memorandum of association dated 1 April 1976 with Jagdish Chand (50 per cent), Lajpat Rai (25 per cent) and Narender Kumar (25 per cent); M/s Lajpat Investors Corporation came into existence by a memorandum of the same date with Jagdish Chander (75 per cent) and Lajpat Rai (25 per cent). The Income Tax Officer disallowed the interest under s.40(b) and the Appellate Assistant Commissioner confirmed the addition. The Tribunal found that the interest payments were made to the two AOPs, who were the creditors, and not to the partners, that an AOP is a distinct person under s.2(31)(v), and, following its own orders in Jagdish Medical Hall and Desai Enterprises, deleted the disallowance. The Tribunal referred the question to the High Court under s.256(1) for assessment years 1978-79 and 1979-80.
The question was answered in the affirmative, in favour of the assessee and against the Revenue, with no order as to costs (para 8). The Tribunal had rightly allowed the deduction of the interest, holding it not hit by s.40(b).
Section 40(b) disallows payment of interest made by the firm to any partner of the firm; here the firm paid interest on deposits standing in the name of an association of persons. Under the scheme of the Act an association of persons is a separate assessable entity: s.2(31)(v) includes an association of persons within the definition of 'person', and s.2(7) defines 'assessee' as a person by whom tax or any other sum is payable, so for all practical purposes an AOP is treated as an assessee and is different from a firm; the Court noted that s.40(ba) specifically deals with the converse case of an AOP paying interest or any other amount to its members (para 4). The Supreme Court in Brij Mohan Das Laxman Das held that, in the words of this report, 'even for the period anterior to 1-4-1995', interest paid to a partner who is a partner representing his Hindu undivided family, on the deposit of his own individual funds, does not fall within the mischief of clause (b) of s.40 (see editor_note on that date); the same principle applies to interest paid to an association of persons (para 5). The Court also noted its own earlier decision upholding the Tribunal's view in Jagdish Medical Hall (para 6) and, respectfully following Brij Mohan Das Laxman Das, held the deduction rightly allowed (para 7).
Thus, for all practical purposes, an association of person is treated as an assessee and is different from a firm.
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Handle my notice → Ask a CA on WhatsAppNo. An association of persons is a separate person under s.2(31)(v) and a separate assessable entity, different from the firm, so interest paid by a firm to an AOP is not interest paid to a partner and is outside s.40(b). The Allahabad High Court applied the Supreme Court's reasoning in Brij Mohan Das Laxman Das, which held that interest paid to a partner who represents his Hindu undivided family, on the deposit of his own individual funds, does not fall within s.40(b). This was decided by the High Court (Not named in the report as available (Allahabad High Court)) and bears on section 40(b), section 40(ba), section 2(31), section 2(7) of the Income Tax Act 1961. It is reported as [2005] 144 Taxman 844 (All). The point is the capacity in which money is held, and it is the mirror of the argument that has to be run under s.40(ba) when the AOP is the payer. The Court noted expressly at para 4 that s.40(ba) deals with the converse situation — an AOP paying interest or another amount to its members — so the same capacity analysis is what has to be confronted there. Practitioners planning deposits between related entities should note how thin the line is: the deposits here had been created by debiting the partners' own accounts and crediting the two AOPs on the same date the AOPs came into existence, and the disallowance still failed because the AOP was a distinct person. If it applies to you, the first step is this: Identify the legal person in whose name the deposit stands and who is entitled to the interest, not the individuals behind it.
The respondent was a registered firm dealing in the wholesale purchase and sale of medicines, with seven partners each holding a one-seventh share: Jagdish Chander (HUF), Lajpat Rai (HUF), Narender Kumar, Latish Kumar, Smt Ram Piari, Smt Prem Lata and Smt Saroj Devi. The Income Tax Officer noticed on the liability side of the firm's balance sheet Rs 20,000 in the name of M/s Narender Investors Corporation (AOP) and Rs 20,000 in the name of M/s Lajpat Rai Investors Corporation (AOP). Those amounts had been transferred to the AOPs on 1 April 1976 by debiting the accounts of Jagdish Chandra, Lajpat Rai and Narendra Kumar. M/s Narendra Investors Corporation came into existence by a memorandum of association dated 1 April 1976 with Jagdish Chand (50 per cent), Lajpat Rai (25 per cent) and Narender Kumar (25 per cent); M/s Lajpat Investors Corporation came into existence by a memorandum of the same date with Jagdish Chander (75 per cent) and Lajpat Rai (25 per cent). The Income Tax Officer disallowed the interest under s.40(b) and the Appellate Assistant Commissioner confirmed the addition. The Tribunal found that the interest payments were made to the two AOPs, who were the creditors, and not to the partners, that an AOP is a distinct person under s.2(31)(v), and, following its own orders in Jagdish Medical Hall and Desai Enterprises, deleted the disallowance. The Tribunal referred the question to the High Court under s.256(1) for assessment years 1978-79 and 1979-80. The matter was decided on 2004-12-20 by the High Court (Not named in the report as available (Allahabad High Court)). On those facts the High Court held as follows. The question was answered in the affirmative, in favour of the assessee and against the Revenue, with no order as to costs (para 8). The Tribunal had rightly allowed the deduction of the interest, holding it not hit by s.40(b).
Section 40(b) disallows payment of interest made by the firm to any partner of the firm; here the firm paid interest on deposits standing in the name of an association of persons. Under the scheme of the Act an association of persons is a separate assessable entity: s.2(31)(v) includes an association of persons within the definition of 'person', and s.2(7) defines 'assessee' as a person by whom tax or any other sum is payable, so for all practical purposes an AOP is treated as an assessee and is different from a firm; the Court noted that s.40(ba) specifically deals with the converse case of an AOP paying interest or any other amount to its members (para 4). The Supreme Court in Brij Mohan Das Laxman Das held that, in the words of this report, 'even for the period anterior to 1-4-1995', interest paid to a partner who is a partner representing his Hindu undivided family, on the deposit of his own individual funds, does not fall within the mischief of clause (b) of s.40 (see editor_note on that date); the same principle applies to interest paid to an association of persons (para 5). The Court also noted its own earlier decision upholding the Tribunal's view in Jagdish Medical Hall (para 6) and, respectfully following Brij Mohan Das Laxman Das, held the deduction rightly allowed (para 7). In the words reproduced by the source cited on this page: "Thus, for all practical purposes, an association of person is treated as an assessee and is different from a firm." The decision followed or applied Brij Mohan Das Laxman Das v. CIT (1997) 223 ITR 825 (SC) — followed; CIT v. Jagdish Medical Hall (IT Reference No. 62 of 1985, decided 5 August 2004, Allahabad High Court) — followed.
It was decided by the High Court on 2004-12-20 and is reported as [2005] 144 Taxman 844 (All). Binding within that High Court's jurisdiction. Persuasive elsewhere. A High Court decision binds the assessing officer, the Commissioner (Appeals) and the Income Tax Appellate Tribunal within that state, and is persuasive elsewhere. If your assessment is in a different jurisdiction, check whether your own High Court has taken the same view before relying on it. On section 40(b), section 40(ba), section 2(31), section 2(7), the practical question is whether the facts of your own notice match the facts of this case closely enough for the same rule to apply.
It helps the taxpayer. The question was answered in the affirmative, in favour of the assessee and against the Revenue, with no order as to costs (para 8). The Tribunal had rightly allowed the deduction of the interest, holding it not hit by s.40(b). It arises in Deductions & Disallowances and How Tax Law Is Read matters, on section 40(b), section 40(ba), section 2(31), section 2(7) of the Income Tax Act 1961, and was decided by Not named in the report as available (Allahabad High Court). Before relying on it, read the source linked on this page and check whether it has since been distinguished, overruled or overtaken by an amendment to the Income Tax Act. In practice the steps that follow from it are these. Where the recipient is an AOP, HUF or other distinct person, plead s.2(31) and Brij Mohan Das Laxman Das and put the department to proof that the payment was to the partner in his capacity as partner. Keep the AOP's own records — memorandum of association, date of formation, member shares, its own return — because the separateness of the entity is what carries the argument. When the same analysis is run under s.40(ba) with the AOP as payer, do not assume it transfers automatically: s.40(ba) has its own Explanations on interest paid and received in a representative capacity, and this judgment does not construe them.
Searched for later treatment; none was found. That is not the same as a source affirming it. Two probes were run and both came back empty. A citedby search on the docid returns no results, and a case-name probe returns only the judgment itself, with indiankanoon's own record showing 'Cited by 0'. So no later decision applies, affirms, doubts, distinguishes or overrules it, and no Supreme Court challenge is traceable. This is a reference under s.256(1) answered by the Allahabad High Court on 20 December 2004 on whether interest paid by a firm to an association of persons in which a partner is a member falls within the disallowance in s.40(b), given the separate machinery of s.40(ba) for an AOP's payments to its members and the definitions of 'person' and 'association of persons' in ss.2(31) and 2(7). A practitioner should treat it as a single uncited authority: it is not bad law, but there is nothing behind it, so the reasoning has to be defended from first principles - particularly the point that s.40(b) speaks of payment to a partner in his capacity as such, while an AOP is a distinct person under s.2(31). Check the current text of s.40(b) and s.40(ba) for the year in question. No source could be cited for that finding. Checking whether an authority still stands matters as much as knowing what it held: a decision may be overruled on one point and survive on another, or the provision it interprets may have been amended since. Read the source and the editor's note on this page before relying on it in a reply to an Assessing Officer or in an appeal.
The report as available on indiankanoon does not name the judges; the 'bench' field records that. Paragraph 8 contains an obvious omission — 'we answer the referred to us in the affirmative' — the word 'question' being dropped. Paragraph 2 records the two AOP balances as Rs 20,000 each while the transfers listed total Rs 65,000 for one AOP and Rs 20,000 for the other, and the disallowance is described both as Rs 72,000 in para 2 and as Rs 7,200 for each year in the question referred and at para 7; the figures in the report do not reconcile and are reproduced as found. The reference relates to two years but the question as framed speaks of interest of Rs 7,200 'each'. The decision is on s.40(b) as it stood for 1978-79 and 1979-80; s.40(ba) is discussed only by way of contrast. Paragraph 5 as reported says that Brij Mohan Das Laxman Das decided the point 'even for the period anterior to 1-4-1995'. No amendment of s.40(b) took effect on 1 April 1995; Explanation 2 to s.40(b), which that judgment treated as declaratory, was inserted with effect from 1 April 1985, and the years in issue here are 1978-79 and 1979-80. The date is reproduced as printed but appears to be a misprint and must not be quoted as a statutory date. This library shows the verification state of every entry openly. This entry has not yet been read in full by a chartered accountant. The summary reflects the sources listed on this page. Read the source before you rely on it in a reply to an Assessing Officer or in an appeal before the Commissioner (Appeals) or the Income Tax Appellate Tribunal.
The question was answered in the affirmative, in favour of the assessee and against the Revenue, with no order as to costs (para 8). The Tribunal had rightly allowed the deduction of the interest, holding it not hit by s.40(b).
TaxSphere, “CIT v Jagdish Medical Agencies”, https://taxnotice.vittsphere.com/caselaw/case/cit-v-jagdish-medical-agencies-interest-to-aop-in-which-partner-is-member/ (validity last checked 2026-09-08)
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