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Section 40(b) of the Income tax Act, 1961 imposes certain ceilings and conditions on the payments made to the partners. For this purpose the section require adequate provision of such payments in the partnership deed itself. In other words in the absence of any such clause permitting such payments the assessing officer can decline the claim.

In a case before the Kerala High Court in the case of Novel Distributing Enterprises v. Dy. CIT (118TAX382) the assessee paid interest on current account balances of the partners. The assessing officer denied such claim on the pretext that the relevant clause in the deed only refer to provision of interest with reference to capital contribution. In this case the assessee approached the Commissioner u/s 264 who also declined to interfere. The High Court also rejected the appellants’ ground and held that the authorities can act only in accordance with the provisions of section 40(b). The fact that the partners so declared such income in their respective hands did not found any relevance.

This case clearly point out to that fact that utmost care must be taken in making entries in the books of account as the same shall conform to the documents /evidence produced before the assessing officer and not otherwise. Any inconsistency between the two must be avoided.

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