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TMI Blog2024 (12) TMI 1049X X X X Extracts X X X X X X X X Extracts X X X X ..... come and therefore the expenditure would be not allowable in terms of sec.14A of the Act is incorrect because admittedly the firm incurred loss and the assessee did not receive any exempt income in the form of share of profits from the firm. For the purpose of allowability of interest under section 36(1)(iii), the commercial expediency has to be looked into as has been held in various judicial pronouncements. In assessee's case, there is no contention in this regard is raised by the revenue and the reason for disallowance is that the assessee is not earning any interest income from the investment made in the partnership firms. This in our considered view is not correct reason for making the disallowance under section 36(1)(iii) in assessee's case. Further from the perusal of the above funds flow statement, it is noticed that the loans and advances given during the year is coming out of the pool of funds which includes capital withdrawn from partnership firms, and without a one-to-one match being established by the revenue, it cannot be said that the borrowed funds are used for giving interest free loans and advances. As submitted during the course of hearing that some of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of Rs. 69,53,573/-. The AO further noticed from on the financial statements filed by the assessee that there is significant increase in the loans and advances given by the assessee and accordingly called on the assessee to explain whether the interest bearing funds have been utilized for interest free loans. The assessee submitted before the AO that the balance in capital account of the assessee is much more than the amount of loans and advances given by the assessee and therefore no disallowance can be made towards interest claimed as a deduction by the assessee. The AO, however, did not accept the submissions of the assessee and held that the interest claimed as deduction by the assessee cannot be allowed as deduction. The reason for making the disallowance is that the borrowed funds are being utilized for investment in capital account of various partnership firms from where the assessee is not earning any income. Further the assessee has extended loans and advances which are not yielding any interest. 3. Aggrieved the assessee filed appeal before the CIT(A). The CIT(A) confirmed the disallowance made by the AO stating that 7. From the balance sheet as on 31.03.2018 suggest that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t been explained by the appellant. Normally, there is a clause in a partnership deed regarding the payment of interest on capital balance of partners but the appellant has not filed the copies of partnership deeds of all the partnership firms in order to explain the reasons for not earning any interest income on the investment made in these partnership firms. In other words, it can be said that the appellant has failed to substantiate that all unsecured loans were raised solely for the purposes of business and were utilized only for the purpose of business. 4. The ld. AR submitted that the assessee is a partner in 17 Firms and that the assessee is earning interest income towards capital invested only from M/s Shri Neminath Buildpro. The ld. AR further submitted that the assessee has invested borrowed funds in various partnership firms and that the investments made in partnership firm are business investments of the assessee. The ld. AR also submitted that the interest income from partnership firm is taxable under section 28 of the Act and therefore the interest claimed by the assessee under section 36(1)(iii) of the Act is an allowable expenses. The ld. AR drew our attention to the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ns and advances. The assessee's argument is that the investment in the capital of the partnership firms are business investments and therefore irrespective of whether any income is earned or not the deduction under section 36(1)(iii) cannot be denied. The assessee has submitted the statement of major contributors for sources and application of funds for the year under consideration before the AO as tabulated below Particulars of Source of Funds Amount Rs. Particulars of Application of funds Amount Rs. Loans taken from friends and Relatives 8,76,33,070 Loans (Liability) 4,15,36,027 Capital withdrawn from various firms 11,14,21,015 Investment in Firms 14,84,37,308 Receipts of advances given 1,55,12,000 Loans and advances 2,60,12,650 Total 21,45,66,085 Total 21,45,66,085 7. From the perusal of above table we notice that the assessee has sourced funds from both interest bearing loans and non-interest bearing funds and that the same is majorly invested in the capital of the partnership firms. There is no dispute that the investment made by the assessee in partnership firms is for the purpose of business. The AO in assessment order has observed that the investment in partnership firm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that the reasoning of the CIT(A) that the interest expense would be expenditure incurred for the purpose of earning income from the partnership firm in the form of share income and therefore the expenditure would be not allowable in terms of sec.14A of the Act. This reasoning of the CIT(A) is incorrect because admittedly the firm incurred loss and the assessee did not receive any exempt income in the form of share of profits from the firm. (emphasis supplied) 8. Section 36(1)(iii) provides that the amount of the interest paid in respect of capital borrowed for the purposes of the business or profession shall be allowed as a deduction. Accordingly the conditions for allowing deduction under this section is that the money, that is capital, must have been borrowed by the assessee, for the purpose of business, and the assessee must have paid interest on the borrowed amount. For the purpose of allowability of interest under section 36(1)(iii), the commercial expediency has to be looked into as has been held in various judicial pronouncements. In assessee's case, there is no contention in this regard is raised by the revenue and the reason for disallowance is that the assessee is not ..... X X X X Extracts X X X X X X X X Extracts X X X X
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