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TMI Blog2021 (11) TMI 495X X X X Extracts X X X X X X X X Extracts X X X X ..... not proper on the part of Assessing Officer to add the difference of interest over and above paid by assessee as expenditure directly related to exempt income. The AO cannot penalize the assessee simply for the reason that assessee cannot claim more than the restricted interest as per section 40(b) of the Act. Otherwise, assessee would have claimed the same interest paid by him to the lenders. Therefore, the interest paid to the firm is not exempt and chargeable to tax. The interest expenses incurred by the assessee is adjustable against the interest income as a separate source of income. It is not proper on the part of AO to treat the interest expenditure with the exempt income from the firm. Therefore, the ground No. 1 raised by the assessee is allowed. - ITA No. 5132/MUM/2018 - - - Dated:- 5-10-2021 - Shri Mahavir Singh (Vice President) And Shri S. Rifaur Rahman (Accountant Member) For the Assessee : Mr. Shekhar Gupta, AR For the Revenue : Mr. Bharat Andhale, DR ORDER PER S. RIFAUR RAHMAN, A.M. The present appeal filed by the assessee is against the order of Commissioner of Income Tax (Appeals)-28, Mumbai [in short CIT(A) ] for the asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 3. From the above computation, he observed as below: 4.1 It can be observed from the above computation that the assessee has adjusted the interest paid on Loan to his income from firm. It is a clear proposition in Income tax Act. 1961 that only those expenditures can be allowed as deductions, which are used for business purposes. Here, the assessee has two types of business income- one is his income from trading in shares and another is his share of profit firm, interest on capital and remuneration from firm. The assessee in his various submissions has admitted that he has advanced the borrowed money to the firm which means he has not used this money in his business activity of trading in shares. Therefore, the interest paid on these borrowed funds cannot be adjusted against the income from trading in shares. The questions which remain now are firstly can the assesse adjust such interest paid against the income from firm and secondly, if at all, can the differential amount between interest paid to bank and interest received from firm can be treated his income. 4.1.1 To seek clarification on the first question, a show cause notice vide e-mail dtd. 14. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of interest other than the interest on capital has been paid by the firm to the partner. Therefore, it is clear that the firm has not paid any interest on funds taken from partner other than capital, which means the partner has not received any business income against the borrowed funds on which the deduction is claimed. In view of the above discussion, it is clear that the assesse has not shown the borrowed funds as his capital rather these arc interest free loans given to firm and hence claim of such deduction of the interest on such borrowed funds, from business income is repudiated and an amount of ₹ 13,12,037/- is added to the Total income of the assesses. 4.1.2 To seek clarification on the second question, assesse was show caused vide letter dated 14/12/2015 as to Interest paid on loan taken from SVC bank is at 14% wherein interest received is at 12%. Why the difference should not be disallowed In reply. the assessee made submissions dated 215' December, 2015, the relevant part of which is reproduced here - With reference to the disallowance of difference in interest of 2% on loan taken from SVC Bank at 14% and given to the firm M/s. Ramanand ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e With reference to the query raised by your goodself regarding disallowance us 14A on interest expenses, we have to state that the amount of loan borrowed by the assessee has been lent to Ms. Ramandnd Kidernath International on which interest has been earned. The assessee has capital of ₹ 9.52 Crores and the investment in the firm is ₹ 8.14 Crores as on 31.03.2013. No part of the borrowed funds from others has been used for the purpose of investment in shares. The details of interest paid are as under: Sr. No. Interest to Amount (₹) 1. Shamrao Vithal Co-Op. Bank Itd 6,94,387 2. Aqustel Water Purification Systems P. Ltd 1,80,000 3. Park Tools Ltd 1,20,000 4. Reha Goenka 1,47,892 5. Shreya 1,69,758 With reference to interest to Shamrao Vithal Co-op. Bank Ltd and Aqustel Water Purif ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ribunal held that share income of a partner from firm has to be excluded from his total income liable to tax and in such a situation, provision contained in section 14A will come into operation and any expenditure incurred in earning said share income has to be disallowed. B) If the assessee's contention that the exempt amount has already been taxed in the hands of firm and is actually not exempt , is accepted then by this logic even the dividend income claimed as exempt by the share/fund holders should not attract the provisions of section 14A because the companies/funds have already paid Dividend Distribution Tax on that income and thus the section itself should become redundant and ultra vires, but the validity of the section has been upheld by Bombay High Court in the case of Godrej and Boyce. Also, there have been number of judicial pronouncements upholding the applicability of section 14A in respect of dividend income. Few of them are quoted below- Smt. Leena Ramachandran [(2011) 339 ITR 296 (Ker)] Technopack Advisors P Ltd [(2012) 50 SOT 31 (Delhi)(URO)] Relaxo Footwear Ltd [ (2012) 50 SOT 102 (Delhi)] Cheminvest Ltd {121 ITD ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ning the disallowance of interest paid to the assessee s minor children whose income is already clubbed with the income of the assessee u/s 64 of the Act. 3. The Ld. CIT(A) has sustained the disallowance of interest without considering the decision of the Special Bench in the case of Vishnu Mahajan wherein the Special Bench held that expenditure proportionate to the exempted income should be disallowed. 6. Before us, the Ld. AR brought to our notice the observation of the Assessing Officer at page 2 of the order and he submitted that the capital of the assessee is ₹ 9.32 crores whereas investment in the firm is ₹ 8.14 crores as on 31.03.2013. He submitted, it clearly indicates that the assessee has not utilized the borrowed funds for the purpose of investment in shares. He relied on the decision of CIT v. HDFC Bank Ltd. [2014] 366 ITR 505 (Bom). Further, he submitted that the Assessing Officer relied on the case of Vishnu Anant Mahajan v. ACIT (2012) 147 TTJ (Ahd)/(SB) 142 which is distinguishable to the facts of the present case. 7. On the other hand, the Ld. DR relied on the orders of lower authorities. 8. Considered the rival submissions and ma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t expenditure as disallowable u/s 14A r.w.s. 8D(2)(i). After careful consideration of the case we noticed that the assessee has borrowed certain funds for the purpose of business and transferred the same to the firm. There is no doubt that this is an expenditure to the assessee. There are only two source of income i.e. first income from the firm and second is trading in shares. From the records submitted before us and even the Assessing Officer observed that the assessee has not utilized the borrowed funds in share business. It is fact on record that the assessee has earned remuneration and interest income from the firm and these are chargeable to tax. As per the submissions of the assessee, the assessee has utilized the loan taken for the purpose of firm. Even in case the AO rejected the contention of the assessee still the interest paid by the assessee is an expenditure for the assessee and assessee can claim this expenditure independently. From the assessment order, we noticed that the Assessing Officer disallowed the interest just because the assessee has utilized the borrowed fund in the firm. 8.2 From the balance sheet submitted before us, we noticed that the assessee ha ..... X X X X Extracts X X X X X X X X Extracts X X X X
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