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2017 (5) TMI 900 - AT - Income TaxAdvancing interest bearing funds to partnership firm on no interest - Reasonable nexus of business expediency - Held that:- The factual position has not been disputed inasmuch as it is not disputed that the funds were invested in the capital of partnership firm and, therefore, the primary intention of assessee was to earn profits from the firm. The contention of assessee that since the profits from firm were exempt u/s 80-IC, therefore, it cannot be said that the investment was not made for the purposes of earning taxable income from firm is not correct because the main issue to be considered in the present scenario is as to how the receipts from firm would be taxable in the hands of assessee. Admittedly, the share of the profits derived from firm is exempt u/s 10(2A) in the hands of assessee and, therefore, to this extent proportionate disallowance can be made. However, interest and remuneration from firm would be taxable as business income in the hands of assessee and, therefore, interest paid on borrowed funds in this regard cannot be disallowed. The taxability of income in the hands of firm is not relevant while considering the nature of receipt in the hands of assessee. Therefore, the assessee’s claim that it had not invested the money to earn any exempt income is not correct. The nature of profits in the hands of firm cannot be the decisive factor for considering the nature of profits in the hands of assessee. In view of above discussion, the Assessing Officer is directed to re-compute the disallowance. - Appeal of the assessee allowed for statistical purposes.
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