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TMI BlogInterest paid to partners on capital is not a statutory allowance u/s 40(b) but is an expenditure u/s 36(1) - Sec. 14A read with Rule 8D is applicableX X X X Extracts X X X X X X X X Extracts X X X X ..... Interest paid to partners on capital is not a statutory allowance u/s 40(b) but is an expenditure u/s 36(1) - Sec. 14A read with Rule 8D is applicable - Commentaries / Editorials Dated:- 5-2-2016 - News - Relevant Extract of the decision of the Tribaunl in A.C.I.T. 19 (3) , Mumbai Versus M/s Pahilajrai Jaikishin and M/s Pahilajrai Jaikishin Versus D.C.I.T. 19 (3) , Mumbai - 2016 (2) TMI 170 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... - ITAT MUMBAI Thus, we hold that interest paid by the assessee firm to the partners on capital contribution is covered as an expenditure as envisaged u/s 36(1)(iii) of the Act and the assessee firm has to firstly establish its claim of deduction of interest on capital by satisfying the provisions of Section 36(1)(iii) of the Act and then, Section 40(b) of the Act puts limitation on allowabi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lity of interest once it passes the requirements of provisions of Section 36(1)(iii) of the Act and thus , interest paid to partners on capital contribution is not a statutory allowance u/s 40(b) of the Act but is an expenditure u/s 36(1)(iii) of the Act. Thus, if this expenditure is incurred in relation to the income which does not form part of the total income under this Act as envisaged u/s 14A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the Act, the same shall only be allowed as deduction only against the exempt income u/s 14A of the Act or in other words , such interest expenditure on the partner capital shall be disallowed u/s 14A of the Act. Our above discussions will also take care of the contention of the assessee firm that under the presumptive scheme of taxation under Section 44AD and 44AE of the Act, the salary and th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e interest payable to partner is deducted from the income of the firm computed under 44AD(1) and 44AE(1) of the Act , subject to the conditions and limits specified in clause (b) of section 40 , rather this contention of the assessee support the stand that the salary and interest payable to partners are an expenditure covered under Section 30 to 37 of the Act as held by Hon ble Supreme Court in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Munjal Sales Corporation(supra) . Thus, we hold that expenditure as envisaged by Section 14A of the Act, duly include interest paid to the partners by the assessee firm if the same is incurred in relation to the income which is not includible in the total income u/s Section 14A of the Act and in that circumstances this interest paid to partners are to be considered as allowable expenditure only ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... against the exempt income u/s 14A of the Act provided other conditions are fulfilled. Thus, we hold that the interest on partner s capital to the tune of ₹ 12,66,679/- as computed by the AO u/s 14A of the Act read with Rule 8D of the Income Tax Rules, 1962 is an expenditure , which is allowable as an expenditure being incurred by the assessee firm in relation to an income which does not f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... orm part of the total income of the assessee firm under the Act , and shall be allowed as deduction from the dividend income from Mutual Funds earned by the assesse firm as envisaged u/s 14A of the Act and shall go to reduce the exempt income earned by the assessee firm from dividend income from Mutual Funds as computed by the AO after applying provisions of Section 14A of the Act read with Rule 8 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... D of Income Tax Rules, 1962 or in other words we uphold the disallowance of interest on partners capital to the tune of ₹ 12,66,679/- u/s 14A of the Act read with Rule 8D(2)(ii) of Income Tax Rules,1962.. We further hold that these allowance / deduction of expenditure of ₹ 12,66,679/- against the exempt income u/s 14A of the Act or in other disallowance u/s 14A of the Act, will not ent ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... itle the partner to claim relief in their individual return of income which shall be chargeable to tax as per the existing and applicable provisions of Section 28(v) of the Act read with Section 2(24)(ve) of the Act after including the afore-said interest income in the hands of the partners. See:- A.C.I.T. 19 (3) , Mumbai Versus M/s Pahilajrai Jaikishin and M/s Pahilajrai Jaikishin Versus ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... D.C.I.T. 19 (3) , Mumbai - 2016 (2) TMI 170 - ITAT MUMBAI - News - Press release - PIB Tax Management India - taxmanagementindia - taxmanagement - taxmanagementindia.com - TMI - TaxTMI - TMITax ..... X X X X Extracts X X X X X X X X Extracts X X X X
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