Suresh Sreeram v. ITO [I.T.A. No. 1605/Bang/2019, dt. 28-1-2021] : 2021 TaxPub(DT) 574 (Bang-Trib)

Disallowance of interest paid for investment in firm under section 14A alleging that no income nor any interest income arose from the partnership firm

Facts:

Assessee was having Vehicle hire, Consultancy and Commission income besides he being a partner in a firm. The said firm had interest payable on capital in its partnership deed. The monies invested in the firm was out of borrowed capital on which interest was paid by the assessee which was claimed as a business loss in his personal tax return against the incomes from the rest of the businesses. Due to losses in the hands of the firm the partners decided not to pay interest on capital for the said year. It was the case of the assessing officer and then upheld by the Commissioner (Appeals) that the said interest payment cannot be allowed as there was no profits or gains which arose from the firm which any case is exempted income besides there being no interest income as well from the firm, the said interest paid was hit by expenditure incurred to earn exempt income under section 14A worthy of being disallowed. Aggrieved assessee went in higher appeal --

Held in favour of the assessee that the firm knowing that they had made loss did not pay interest thus there was no income which could be taxed from the firm for the interest or salary under section 28(vi). The interest paid was a fact which cannot be denied by the revenue as the said capital invested in the firm was thru borrowings. The interest was allowable under section 70 as an intra head set off of loss of one business against the profit of another business. The disallowance under section 14A was not called for in this case.

Applied:

CIT v. Ramniklal Kothari (1969) 74 ITR 57 (SC) : 1969 TaxPub(DT) 0354 (SC)