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2021 (11) TMI 495 - ITAT MUMBAIDisallowance of interest u/s 14A - Treatment of interest expenditure with the exempt income from the firm - Identification of how the own funds were utilized by the assessee - Whether assessee has not utilized the borrowed funds for the purpose of investment in shares? - disallowance of interest paid to the assessee’s minor children whose income is already clubbed with the income of the assessee u/s 64 - HELD THAT:- Assessee has borrowed certain funds and utilized the same in the firm. In our considered view, the assessee has duly earned the interest income from the firm and also incurred interest expenditure on the funds utilized for the purpose of the business. Therefore, the assessee is eligible to claim the above expenditure independently against the income earned by the assessee. It is important to note that the earning of interest income is restricted by the provision of section 40(b) whereas assessee has to incur interest expenditure as per agreement with the lenders. The source of interest income from the firm is not exempt. Therefore, it is not proper on the part of Assessing Officer to add the difference of interest over and above paid by assessee as expenditure directly related to exempt income. The AO cannot penalize the assessee simply for the reason that assessee cannot claim more than the restricted interest as per section 40(b) of the Act. Otherwise, assessee would have claimed the same interest paid by him to the lenders. Therefore, the interest paid to the firm is not exempt and chargeable to tax. The interest expenses incurred by the assessee is adjustable against the interest income as a separate source of income. It is not proper on the part of AO to treat the interest expenditure with the exempt income from the firm. Therefore, the ground No. 1 raised by the assessee is allowed.
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