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2016 (11) TMI 963 - AT - Income TaxDisallowance of interest expenses - whether interest expense was incurred to earn interest income on capital balance in the firm which is taxable as business income? - "Income from other sources" OR "Business Loss" - Held that:- No doubt, the interest due to or received by partner on capital contributed by partners in partnership firm is assessed to tax as business income u/s 28(v) of the Act in the hands of the partner but the assessee could not show that the partners have in-fact agreed to pay interest on their capital contributed in the partnership firm M/s Systematic Exports during the impugned assessment year and a valid and legal binding obligation is cast on the partnership firm M/s Systematic Exports to pay interest on capital specifically to the partners in presenti during the impugned assessment year . The assessee’s had taken a contention that had there been any profits in Systematic Export, the assessee would have received interest from the partnership firm need verification from the actual conduct of Systematic Exports over the years to prove that the firm Systematic Exports 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
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