2012 (6) TMI 356 - AT - Income Tax

Dis-allowance u/s 14A of notional interest paid on loan taken for capital contribution in partnership firm - Revenue contended that interest incurred has resulted into taxable as well as tax free income u/s 10(2A) and hence that portion of the interest expenditure which relates to the share of profit is Liable to be disallowed - Held that - Partnership Act does not contemplate or stipulate capital contribution by the partner as one of the conditions for a partnership firm. Nowhere in the clauses of partnership Agreement it has been stated that contribution of money towards capital or loan were the conditions of admittance of the new partners for sharing of profits by the partners Alt the partners, including the appellant, are entitled to the profit sharing as per the partnership deed and the same was not dependent on contribution of funds made by the partners. Hence, CIT(A) rightly held that the provisions of section 14A are not applicable in the present case - Decided in favor of assessee.

Summary

Issues:
Appeal against CIT(A)'s order directing deletion of addition under section 14A for notional interest paid to Reliance Capital Ltd.

Detailed Analysis:
1. Background: The appellant, a trust engaged in shares and securities business and a partner in a firm, obtained a loan from Reliance Capital Ltd (RCL) used for trading in shares and securities and capital contribution to the firm. The AO estimated and disallowed interest expenses of Rs. 33,08,179 under section 14A.

2. AO's Observations: The AO noted a high correlation between capital contribution and profit sharing ratio in the partnership firm. The AO disallowed the interest cost proportionately based on sales, interest income, and share of profit from the partnership firm.

3. CIT(A)'s Decision: The CIT(A) deleted the addition under section 14A, emphasizing a direct nexus between the loan from RCL and contribution to the partnership firm. The CIT(A) rejected the AO's contention of disallowance based on taxable and exempt income, stating that partnership deed didn't mandate capital contribution for profit sharing.

4. ITAT's Decision: The ITAT upheld the CIT(A)'s decision, dismissing the department's appeal. The ITAT concurred with the CIT(A)'s reasoning, emphasizing the absence of a requirement for capital contribution in the partnership deed for profit sharing.

5. Conclusion: The ITAT affirmed the deletion of the addition under section 14A, highlighting the direct link between the loan obtained and capital contribution to the partnership firm. The decision emphasized the partnership deed's provisions governing profit sharing without mandating capital contribution for partners.