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2021 (2) TMI 169 - ITAT BANGALOREDisallowance of interest expenditure in the hands of partner - Whether it is in relation to business of the assessee - assessee claimed deduction of interest on funds borrowed for the purpose of investment as capital in the business of the partnership firm - Assessing Officer however held that no income has accrued to the assessee from the partnership business during the financial, expenses do not have any nexus with the other source of income under the head PGBP i.e., vehicle hire, consultancy or commissioner expense. Hence, the interest expense was proposed to be disallowed u/s 37 as the expenses were 'not laid out wholly and exclusively for the purpose of business or profession' - HELD THAT:- Since the funds were borrowed from external sources, interest was payable by the assessee to its unsecured lenders. The partner claimed the deduction which it was entitled u/s 36(1)(iii) and 37 with income earned from other sources of income under the same head i.e. Vehicle hire, Commission Income and Consultancy income. This resulted in a loss arising from one source under the head business which was set-off with another source of income under the head of PGBP in terms of section 70. Interest, salary, bonus, commission or remuneration received or receivable from the firm by the partners shall be assessable in the hands of the partners as income from business or profession under section 28 of the Act. The partner shall be entitled to all expenditure which is incurred to earn such income or for purposes of the said business. Other deductions as admissible in law can also be claimed by the partner against such income. Under the old provisions, section 67(3) entitled a partner to claim deduction in respect of any interest paid by a partner on capital borrowed by him for the purposes of investment in the firm from the share income. Absence of earning any interest income on capital from the firm is no bar to claim the interest paid on borrowings for the purpose of contributing capital to the firm by the assessee as deductible expenditure. In such an event there would be loss under the head”PGBP” subhead “interest, salary from the partnership firm” and the assessee is entitled to set off the said loss against other income under the same head “PGBP”. 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. - Decided in favour of assessee.
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