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2021 (8) TMI 202 - ITAT MUMBAIDisallowance towards interest u/s.36(1)(iii) in the hands of partner - interest paid on borrowed funds - as per revenue since assessee was not receiving any interest income from the capital contribution made in the partnership firm, the only income that would be received by the assessee would be share of profit from the partnership firm which would be exempt from tax and hence, interest paid on borrowed funds is not eligible for deduction u/s.36(i)(iii) - HELD THAT:- We are unable to persuade ourselves to accept to this proposition there is absolutely no nexus of borrowed funds being used for investment in capital contribution of partnership firm which is brought on record by the lower authorities. We hold that there cannot be any assumption / presumption that only borrowed funds were used for making investment in capital contribution of partnership firm, unless there is mixed funds (i.e borrowed funds and own funds inextricably mixed in the same bank account). In any case, there is no dispute that assessee is a partner in Ambhe Properties (firm) - it is a duty of the assessee in the capacity of a partner to pump in sufficient capital contribution for the smooth running of the business of the partnership firm. This investment is to be considered as an investment made as a measure of commercial expediency. Obviously, the amount contributed by the partner would be certainly a business investment and would be for business purposes. Even if the funds required for the said contribution were received out of borrowed funds, still the business purpose of making the investment and business purpose of utilisation of borrowed funds thereon is proved beyond doubt and cannot be doubted at all. For the purpose of allowability of interest on borrowed funds u/s.36(1)(iii) of the Act, what is required is only whether the borrowed funds have been used by the assessee for the purpose of business. It is totally irrelevant and immaterial whether any return on investment has been received in the form of taxable income or exempt income by the assessee out of utilisation of such borrowed funds. As already held hereinabove that amount invested in partnership firm by the assessee partner is certainly for business purpose and hence, there cannot be any disallowance of interest u/s.36(1)(iii) of the Act. In view of the aforesaid observations, the grounds raised by the assessee are allowed.
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