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Issues involved: Determination of whether interest expenditure can be allowed against interest earned on capital investment in a partnership firm disallowed u/s 14A r.w.r 8D of IT Rules.
Summary: The appeal was filed by the revenue against the CIT(A)'s order for the Assessment Year 2006-07, specifically challenging the allowance of interest expenditure against interest earned on capital investment in the firm, which was disallowed u/s 14A r.w.r 8D of IT Rules. The assessee, a partner in the firm, earned interest on the capital contributed in the partnership firm, part of which was borrowed from a bank. The Assessing Officer disallowed a portion of the interest paid on the bank overdraft facility against the interest income earned on the capital invested in the firm, invoking provisions of sec. 14A r.w r. 8D of the IT Rules. On appeal, the CIT(A) allowed the deduction of interest expenditure from taxable interest earned on the capital, citing a direct nexus between the two. During the proceedings, the revenue argued that the share of profit from the partnership firm is exempted from tax u/s 10(2A), and therefore, the interest expenditure related to this income should not be allowed as a deduction. Conversely, the assessee's representative contended that the interest paid on funds for contribution in the partnership firm should not be treated as expenditure for earning profit in the firm. After considering the arguments and examining the capital contribution and profit sharing ratio among partners, it was found that there was no direct relation between the two. Referring to a previous Tribunal decision, it was concluded that the interest expenditure had a direct and sole relation with the interest income earned, and therefore, no disallowance of interest expenditure was warranted u/s 14A. Ultimately, the Tribunal confirmed the CIT(A)'s order, dismissing the appeal filed by the revenue. The judgment was pronounced on June 29, 2011.
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