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TMI Blog2016 (11) TMI 963X X X X Extracts X X X X X X X X Extracts X X X X ..... orts in fact paid interest on capital contributed by the partners when there were profits in the said firm . The share of profits on the capital contributed by the assessee with the partnership firm M/s Systematic Exports , are exempt from tax u/s. 10(2A) of the Act. Thus, necessarily the expenses incurred in relation to earning of the income which does not form part of total income, has to be disallowed as per provisions and mandate of Section 14A of the Act unless it is shown that the interest is paid / payable on the capital contributed by the partner in the firm Systematic Exports which interest is chargeable to tax u/s 28(v) of the Act . Interest of justice will be best served if the matter is set aside and restored to the file of the AO for fresh determination of the issue on merits - I.T.A. No. 1430/Mum/2014 - - - Dated:- 11-11-2016 - Shri C. N. Prasad, Judicial Member And Shri Ramit Kochar, Accountant Member Assessee by : Shri Rishabh Chaturvedi Revenue by : Ms. Pooja Swaroop ( D.R. ) ORDER Per Ramit Kochar, Accountant Member This appeal, filed by the assessee, being ITA No. 1430/Mum/2014, is directed against the appellate order dated 7th Octob ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ginal return of income filed may be treated as having filed in response to notice u/s 148 of the Act. The case was reopened to disallow the claim of deduction of ₹ 10,27,507/- on account of interest payment to LIC of India against salary income and interest income and the assessee has submitted as under:- 1. I have borrowed from LIC and have paid interest of ₹ 10,27,507/- during the year ended 31.3.2010. 2. Above borrowed funds have been utilized by me in investing in Systematic Exports, a firm in which I am a partner. 3. The purpose of giving above loan was to earn interest. However, unfortunately, due to losses, Systematic Exports has been unable to pay any interest. 4. If Systematic Exports had earned profits and was in a position to pay interest to me, I would have shown the same as my Business Income as per 28(v) of the said Act. The interest paid by me on borrowings utilized with the purpose of earning interest is a deductible business expenditure under section 36,37 and other relevant provisions of the said Act. 5. I have, by mistake, claimed the said interest as deduction from income from other sources. By this letter, I wish to corr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssee is a partner. The assessee credited this borrowed fund in his capital account in the books of the firm and interest is allowable to partners in terms of partnership deed of the firm. The assessee submitted copy of bank book, bank statements, capital account, partnership deed, balance sheet and income tax return of the firm etc. before the learned CIT(A). The learned CIT(A) observed that the assessee has availed loan from LIC on which interest of ₹ 10,27,507/- was paid by the assessee which was set off against income from other sources and salary income. The assessee had claimed to have invested loan proceeds from LIC in the capital of the firm M/s Systematic Exports for the purposes of earning interest as per contentions of the assessee. The learned CIT(A) observed from the balance sheet of the firm M/s Systematic Exports that the assessee had opening outstanding capital at ₹ 4,82,079/-, additions made during the year at ₹ 67,786/-, withdrawals during the year at ₹ 5,33,834/-, share of loss at ₹ 5,29,619/-, and closing balance in negative at ₹ 5,13,588/-. The assessee was entitled to 15% share in the capital of firm and his capital at the en ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... LIC loan which was invested in partnership firm was rightly disallowed by the A.O. as the share of profit from partnership firm is exempt from tax u/s 10(2A) of the Act. The learned DR relied on the orders of the learned CIT(A). 9. In the rejoinder, the ld. Counsel submitted that interest income on capital of partnership firm is taxable u/s 28(v) of the Act and hence interest should be allowed as deduction / set off against income from other sources and salary. It was submitted that had there been profits, the partnership firm Systematic Exports in which the assessee was partner would have given interest on the investment in the capital by the assessee. 10. We have heard the rival contentions and also perused the material available on record. We have observed that the assessee is partner in firm M/s Systematic Exports. The assessee has availed loan from LIC and paid interest of ₹ 10,27,507/- which was claimed as an expense under the head profit and gain from business or profession . The assessee has set off the said interest paid to LIC against income from other sources and salary income. The assessee has income from other sources to the tune of ₹ 1,18,297/- and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... wals during the year at ₹ 5,33,834/-, share of loss at ₹ 5,29,619/-, and closing balance in negative at ₹ 5,13,588/-. The assessee was entitled to 15% share in the capital of firm and his capital at the end of year was negative, as against total capital of the firm at ₹ 346.05 lakhs. The assessee could not rebut said findings before the Tribunal rather the audited financial statements of Systematic Exports confirms the finding of learned CIT(A) page 21/paper book filed with the Tribunal. There is no binding stipulation in the partnership deed w.r.t. payment of interest on capital contributed by partners rather there is a general clause in partnership deed vide clause 8 which reads as under : The capital of the partnership shall be brought in by the partners as and when required for the business in the manner as mutually agreed upon between the parties referred hereto, and the partners may be paid interest, at a rate, on their Capital as may be mutually agreed upon from time to time. There is a general clause in the partnership deed vide clause 8 of partnership deed that the interest may be paid to the partners on the capital contributed to the par ..... X X X X Extracts X X X X X X X X Extracts X X X X
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