G.R.RAGHAVAN, AM. This appeal by assessee is against order of AAC, A-Range, Raipur in his Appeal No. Rjn. B-64/82-83 dt. 30th March, 1983 relating to asst. yr. 1980-81 confirming interest paid to partners by firm disallowed under s. 40(b) as also disallowance made by ITO in loss claimed in bardana account to extent of Rs. 3,000. fact in this regard, rival submissions and our conclusion thereon are discussed hereunder. assessee is partnership concern dealing in grains and oil seeds. There was claim for allowance of loss of Rs. 20,779 in bardana account. ITO notice, that actual consumption during year of account was 2717 gunny bags billed at Rs. 14,582 at Rs. 6.72 per bag. He came to conclusion, that, claim of loss to extent of Rs. 20,779 was excessive considering that opening and closing stocks were estimated at round figures of Rs. 9,000 and R s . 10,000 respectively and there was no proper check on account. Accordingly, he disallowed Rs. 10,000 from claim. ITO also notice, that, firm had credited individual accounts of partners S/Shri Poonamchand, Bansilal and Mangalcand with interest amounting to Rs. 8,003, Rs. 3,990 and Rs. 4,636 respectively amounting in all to Rs. 16,630. He disallowed interest invoking provisions of s. 40(b) which lays down, that, in case of firm, any payment of interest to any partner of firm shall not be deducted. On appeal, AAC reduced disallowance of loss in bardana account to Rs. 3,000 and confirmed interest disallowance observing as follows: "The ITO disallowed payment of interest to tune of Rs. 16,630 under s. 40(b). appellant s counsel submitted that partners represent their respective HUFs in appellant firm and investments were made in their capacities as individuals. So counsel pleaded that interest paid to partners in their individual capacities should not have been disallowed by ITO under s. 40(b). counsel relied on decision in case of Terla Veeraiah vs. CIT (1979) 120 ITR 502 (AP). However, I am of opinion that partners are only individuals. So far as firm is concerned investment made by them in their individual capacities in firm would attract s. 40(b). I confirm disallowance made by ITO. disallowance of Rs. 16,630 is confirmed." Aggrieved with retention of disallowance to extent of Rs. 3,000 in bardana account and confirmation of disallowance of Rs. 16,630 being interest credited to partner s accounts under s. 40(b), assessee is in appeal before us. As regards bardana account, it was submitted on behalf of appellant, that, total loss claimed in this account was Rs. 20,779 which was made up of Rs. 10,242 being loss in respect of 2717 bags due to short recovery in their cost to extent of Rs. 10,242 plus packing charges amounting to Rs. 2,595 and wear and tear of bags to extent of Rs. 7,942. cost of 2717 bags was stated to be Rs. 14,582 which was fully supported by vouchers. recovery effected in respect of these bags was only Rs. 4,340 and, therefore, there was price difference to extent of Rs. 10,242, which assessee had to bear. In addition, it was stated, that, wear and tear of old bags worked out to Rs. 7,942 in addition to packing expenses amounting to Rs. 2,595. It was, therefore, submitted, that there was no basis for disallowance of any amount in this regard. As regards disallowance of interest credited to partners accounts, following submissions were made: partners were representing their respective joint families in their capacity as Kartas in partnership in question. partners had also advanced moneys to firm in their individual capacity. interest paid by firm was in individual accounts of partners on funds adanced by them, not in their capacity as partners on behalf of respective joint families, but in their individual capacity. It was, therefore, contended, that interest credited to these accounts was not covered by s. 40(b), as this section was applicable only in respect of interest paid to partners of firm. It was submitted, that, decisions of Madhya Pradesh High Court in Jalam Chand Mangilal (No. 1) vs. CIT (1983) 33 CTR (MP) 32: (1982) 138 ITR 343 (MP) and Jalam Chand Mangilal (No. 2) vs. CIT (1983) 33 CTR (MP) 29: (1982) 138 ITR 347 (MP) were no longer good law in view of dismissal by Supreme Court of S.L.P. (Civil) No. 7736 of 81 filed by Department against decision of Gujarat High Court in CIT vs. Sajjanraj Diwanchand (1982) 21 CTR (Guj) 26: (1980) 126 ITR 654 (Guj). main contention in this behalf was, that the, partners were partners, of firm in their capacity as Kartas of respective HUFs and, therefore, interest credited on moneys advanced by them in their individual capacity was not liable to be disallowed under s. 40(b) and support for this view was sought to be derived from decision of Gujarat High Court in (1981) 21 CTR (Guj) 56: (1980) 126 ITR 654 (Guj). Reliance was also placed on following decisions of various other High Courts: (1983) 144 ITR (St.) 15, CIT vs. Pannalal Hiralal & Co. (1983) 36 CTR (Bom) 414: (1984) 146 ITR 549 (Bom), CIT vs. Hansa Dyeing & Printing Works 1976 CTR (Bom) 482, CIT vs. K.Krishnaiah Chetty & Sons (1981) 131 ITR 410 (AP), Venkatesh Emporium vs. CIT (1982) 137 ITR 593 (Mad), Ram Lal & Sons vs. CIT (1980) 15 CTR (All) 74: (1980) 124 ITR 157 (All). Our attention was also invited to decision of Tribunal in12 ITC (1984) p. 187 and First ITO vs. S.R.S. Brothers (1984) 20 TTJ (Mad) 8 in support of stand taken in this behalf. assessee s representative also fairly conceded, that, following cases were against stand taken in this behalf but, however, argument highlighted for our consideration was, that, though this case came under jurisdiction of Madhya Pradesh High Court, decisions of that Court in (1983) 33 CTR (MP) 32: (1982) 138 ITR 343 (MP) and (1983) 33 CTR (MP) 29: (1982) 138 ITR 347 (MP) were no longer good law in view of dismissal by Supreme Court of S.L.P. (Civil) No. 7736 of 81 filed by Department against (1981) 21 CTR (Guj) 26: (1980) 126 ITR 654 (Guj), CIT vs. London Machinery Co. (1979) 10 CTR (All) 301: (1979) 117 ITR 111 (All), CIT vs. Brij Mohan Das Laxman Das (1979) 11 CTR (All) 243: (1979) 117 ITR 121 (All), Sanghi Motors vs. CIT (1982) 29 CTR (Del) 182: (1982) 135 ITR 359 (Del), 138 ITR 343 and 347 (MP). We have heard ld. Department representative. We are unable to agree, that, decisions of Madhya Pradesh High Court in 138 ITR 343 and 347 are no longer good law in view of dismissal by Supreme Court of S.L.P. against (1981) 21 CTR (Guj) 26: (1980) 126 ITR 654 (Guj) referred to earlier, inasmuch as, facts in Gujarat High Court s decision are distinguishable from facts of present case which are identical to those of (1983) 33 CTR (MP) 26: (1982) 138 ITR 347 (MP). In Gujarat High Court s decision, facts were as follows: assessee firm had three partners out of whom, SJ had joined firm i n his capacity as Karta of HUF of SJ. During relevant accounting year, firm had paid interest amounting to Rs. 7,777 to HUF. Applying provisions of s. 40 (b), ITO disallowed interest paid to HUF. Tribunal held, that interest credited to HUF s account was admissible deduction. On reference, Gujarat High Court held that, "there were two separate accounts and in account of HUF it was shown, that HUF was creditor of firm and on amounts standing to credit of HUF, interest of Rs. 7,777 was paid by firm to HUF. There was separate account of individual partner SJ and in that account, no interest was paid in relevant year. Therefore, High Court held, that amount Rs. 7,777 was paid by way of interest of HUF which was paid creditor of firm." They also held, that, fact that "the Karta" of HUF was partner of firm was not relevant because under s. 40(b) it was only interest paid to partner which was not allowed to be deducted. Accordingly to the, interest paid to any other creditor of firm could not be disallowed under provisions of s. 40(b). From above facts, it is clear that creditor of firm was not partner but HUF of which partner was Karta and, therefore, creditor of firm was separate entity was rightly held to be not governed by s. 40(b). It was against this decision, that S.L.P. filed by Department was dismissed by Supreme Court vide (1983) 144 ITR (St.) 15. In present case, facts are totally different. interest was not paid by firm in HUF s account. interest was credited in individual partner s accounts and individuals were representing their respective HUFs in partnership. distinction between these two cases is, that, in Gujarat High Court s decision, interest was paid to HUF s account and not in individual partner s account. That was reasons for High Court holding, that creditor of firm was not partners, but HUF of which partner was Karta and, therefore, interest paid to HUF s account was interest paid to separate entity and not to be disallowed under s. 40(b). In this case, interest was paid not in HUF s account but in individual partner s accounts who were partners in firm representing their respective HUFs. This fundamental difference between these two cases should not be over looked in trying to find out whether decisions of Madhya Pradesh High Court in (1983) 33 CTR (MP) 32: (1982) 138 ITR 343 (MP) and 347 are no longer good law. In (1983) 33 CTR (MP) 32: (1982) 138 ITR 343 (MP), facts were as under. Interest on capital and loans had been paid to partners of firm and same was disallowed under s. 40(b). It was held by Madhya Pradesh High Court in above decision, that, it did not matter whether partner had joined firm in their individual capacity or as Kartas of their respective HUFs. High Court referred to decision of Supreme Court in CIT vs. Bagyalakshmi & Co. (1965) 55 ITR 660 (SC) that whatever be relationship of partner qua his undivided family, in respect of partnership, he acts as individual qua partnership firm. High Court also referred to decision of Allahabad High Court in (1979) 10 CTR (All) 301: (1979) 117 ITR 111 (All) which held, that person who was partner in firm entered into contract in his personal capacity only and even though he represented his HUF, interest paid to him would not be deductible in computing business income in view of embargo contained in s. 40(b) of IT Act. reference was also made to Madhya Pradesh High Court s decision in Dwarkadas Rameshwar Goenka vs. CIT (1980) 18 CTR (Mad) 66: (1981) 127 ITR 397 (Mad) to same effect. On reliance being placed on behalf of assessee in that case on (1981) 21 CTR (Guj) 26: (1980) 126 ITR 654 (Guj), Madhya Pradesh High Court distinguished facts of that case from those of case with which it was dealing. They mentioned, that, in decided case one of partners had entered into partnership in his individual capacity but loan was advanced from HUF account and interest was also credited into separate account. They found, that, these facts were totally different from facts of case before them and did not see any reason to follow decision in (1981) 21 CTR before them and did not see any reason to follow decision in (1981) 21 CTR (Guj) 26: (1980) 126 ITR 654 (Guj). In (1983) 33 CTR (MP) 29: (1982) 138 ITR 347 (MP), High Court decided, that irrespective of capacity in which person became partner of firm, s. 40(b) was bar to payment of interest to him. They held, that, main fact to be considered for applying s. 40(b) was not, as to, in what capacity loan was advanced or interest was paid to person who had joined as partner of firm. They further held that, where person joined as partner of firm in his individual capacity and interest was paid to him as Karta of HUF, payment of interest was not deductible under s. 40(b). While coming to this conclusion, they referred to decision of Allahabad High Court in (1979) 10 CTR (All) 301: (1979) 117 ITR 111 (All) with approval. In that case, Karta partners deposited funds in their individual capacity and firm paid interest to them as individuals as exactly happened in this case. matter being finally taken to Allahabad High Court, it was held, that interest paid by firm to partner on amounts brought in their individual capacity was case of interest paid to partners and as such inadmissible under s. 40(b). Madhya Pradesh High Court also referred to Gujarat High Court s decision in (1981) 21 CTR (Guj) 26: (1980) 126 ITR 654 (Guj) and summarised salient features of decision as under: "The Gujarat High Court in Sujjanraj s case seems to distinguish case where person enters into partnership in his capacity as Karta of HUF and is paid interest in his individual capacity, and case where person enters into partnership agreement in his individual capacity and interest is paid to him representing his HUF. In former case, Gujarat High Court agrees with Allahabad High Court that interest is not allowable as deduction but in latter case it is so allowable. We are unable to accept this dichotomy." Even in view of Madhya Pradesh Court, decision in (1981) 21 CTR (Guj) 26: (1980) 126 ITR 654 (Guj) favoured disallowance of interest paid to partner in his individual capacity when he has entered partnership in his capacity as Karta of HUF. They no doubt, held, that distinction made by Gujarat High Court with regard to interest paid when person entered partnership in his individual capacity and interest was paid to him representing his HUF, was not acceptable to them. From this, it is very clear, that Gujarat High Court itself in (1981) 21 CTR (Guj) 26: (1980) 126 ITR 654 (Guj) has held, that interest paid to partner in his individual capacity, when he has entered partnership in his capacity as Karta of HUF is not admissible under s. 40(b). In present case, partners are presenting their respective HUFs in firm. However, interest has been paid in their individual accounts on funds individually advanced by them to partnership and no interest has been paid in accounts of HUFs. In (1981) 21 CTR (Guj) 26: (1980) 126 ITR 654 (Guj), it has been clearly laid down, that, interest credited to HUF s account, when Karta is representing same in partnership alone in not to be disallowed under s. 40(b). following passage from this decision makes this point very clear: "Under these circumstances, in every case test to be applied is as to who is partner of firm and irrespective of character in which he is partner of firm, whether any interest is paid to him as partner. If creditor of firm is not partner but HUF of which partner is Karta, then separate entity is creditor of firm and interest paid to that separate entity will not be governed by s. 40(b) and cannot be disallowed. In instant case, there were two separate accounts, one in individual name of Sajjandas Jwaladas and other in name of HUF of Shri Sajjandas Jwaladas. amount of Rs. 7,777 was paid as interest to HUF of Sajjandas Jwaladas. That being case, it was paid to creditor who was not partner of firm. Under these circumstances, conclusion of Tribunal was correct. We, therefore, answer question referred to us in affirmative, that is, in favour of assessee and against Revenue. CIT will pay costs of reference to assessee." In present case, creditor of firm are definitely partners. This distinction has been very clearly brought out by Madhya Pradesh High Court at page 350 of decision in 138 ITR. We are, therefore, of opinion, that, even as per decision of Gujarat High Court in (1981) 21 CTR (Guj) 26: (1980) 126 ITR 654 (Guj), interest paid to individual partners cannot be allowed as deduction (vide page 350 of 138 ITR). We are, therefore, of opinion, that decision of Madhya Pradesh High Court in 138 ITR has not been overruled by implication as suggested on behalf of assessee by virtue of dismissal of S.L.P. No. 7736 to 81 by Supreme Court. very same view has been upheld in 117 ITR at page 111 and 121 as also by Delhi High Court in 135 ITR 359. In 135 ITR, assessee was partner in his capacity as Karta of HUF and advanced moneys also in his individual capacity. Interest paid on his individual account was held to be inadmissible under s. 40(b). decision of Bombay High Court in 1976 CTR (Bom) 482 is not apposite in context of this case, as that decision turned on fact, whether provisions of turned on fact, whether provision of s. 154 were applicable to disallow interest paid in individual account of partner. It is, therefore, needless for us to discuss other decisions, inasmuch as, we are of opinion, that, even as per decision of Gujarat High Court in (1981) 21 CTR (Guj) 26: (1980) 126 ITR 654 (Guj), interest paid on advance made by partners in their individual capacity, when they are partners of firm in their representative capacity is to be disallowed under s. 40(b). This proposition has been clearly established by Madhya Pradesh High Court in (1983) 33 CTR (MP) 29: (1982) 138 ITR 347 at 350 (MP). We are, therefore, of opinion, that decision of Madhya Pradesh High Court still holds good and, since this case falls within jurisdiction of that High Court, were are bound to follow that decisions with respect. Even otherwise, as mentioned by us, even 126 ITR of Gujarat High Court lends support to view, that interest paid in individual accounts of partners is not admissible under s. 40(b). We therefore, confirm disallowance of interest effected by ITO under s. 40(b). In result appeal is allowed in part. *** DEEPCAND MANAKLAL v. INCOME TAX OFFICER