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TMI Blog2010 (10) TMI 407X X X X Extracts X X X X X X X X Extracts X X X X ..... ed in the firm should have been disallowed u/s.14A and thus the entire income cannot be allowed as deduction 2. On the facts and in the circumstances of the case and in law, the Ld.CIT(A) erred in coming to the conclusion that the entire interest paid on the money borrowed from Reliance Capital Ltd. has been paid on the funds which are utilized only for earning interest from partnership firm and not the share or profit as well. 3. On the facts and in the circumstances of the case and in law, the Ld.CIT(A) erred to appreciate that interest paid amounting to Rs. 1,82,20,173/- should be apportioned between the share of profit earned and the interest earned in the capacity of a partner of the partnership firm and hence the proportionate disallowance should have been done u/s.14A." 3. Briefly stated the facts of the case are that the assessee was engaged in the business of trading of various commodities. A deduction of Rs. 1,82,20,173 was claimed towards interest expenditure. The Assessing Officer noted that the assessee had shown other income of Rs.2.35 crores which included interest on capital of Rs. 2,34,77,492 from the firm in which it was a partner. Further the share of profit f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f section 14A in its grounds of appeal for making out a case that proportionate amount of interest on borrowed and invested in the firm should have been disallowed u/s.14A. In order to answer the chief question, it is imperative to decide the following inter-related issues:- A. Interest earned from firm is taxable under which head of income. B. Whether the interest expenditure is allowable u/s 36(1)(iii). C. Attractability of provisions of section 14A. D. Amount disallowable u/s.14A, if any. A. INTEREST EARNED FROM FIRM IS TAXABLE UNDER WHICH HEAD OF INCOME 5. The view point of the Assessing Officer is that the interest of Rs.2.34 crores received from partnership firm M/s Sreenath Enterprises was taxable under the head `Income from other sources' as the assessee was engaged in the business of "Trade" and hence the contention of the assessee to be engaged in the business activities of entering into partnership firms, was not acceptable. On the other hand the assessee claimed that it was engaged in the business of entering into partnership, giving loans and making investments. In order to buttress its stand, the assessee placed reliance on certain clauses of the MoA. There is n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t from relying on certain object clause in the MoA, the assessee has not furnished any details to indicate that it was actually engaged in the business activity of entering into partnership firms. As such, we refuse to accept this contention put forth on behalf of the assessee. 6. Section 28(i) provides that "the profits and gains of any business or profession which was carried on by the assessee at any time during the previous year" shall be chargeable to income-tax under the head `Profits and gains of business or profession'. It, therefore, manifests that unless business is actually carried on by the assessee at any time during the previous year, the income generated from any activity, cannot be classified u/s. 28(i). Adverting to the facts of the instant case, it is noticed that no material, except a bald assertion, has been placed on record to demonstrate that the assessee was, in fact, engaged in the business of entering into partnerships. As such, the contention that the earning of interest income from the firm as falling under the head `Profits and gains of business or profession' on the strength of carrying on business of entering into partnership firms, is bereft of any f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ver name, are received by a person as partner from a partnership firm, these will partake of the character of `Business income', notwithstanding the fact that the entering into partnership was or was not the business of the assessee. 8. When a specific provision has been enshrined in the Act, through clause (v) of section 28, for treating interest and salary etc. earned by a partner from a firm as taxable under the head "Profits and gains of business or profession", there is no question of categorizing it under the residual head of income. The logic is very simple which can be culled out from the mandate of section 56(1). This provision provides that income of every kind which is not to be excluded from the total income under this Act shall be chargeable to income-tax under the head "Income from other sources", if it is not chargeable to income-tax under any of the heads specified in section 14, items A to E. Section 14, in turn, includes specifically Profits and gains of business or profession under the head D. On a conjoint reading of section 56(1) with section 14, it become abundantly clear that if a particular item of income is covered under the specified heads u/s 14 su ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rprises, the partnership firm from where interest income of Rs.2.34 crores was earned. The same contention was reiterated before the learned first appellate authority. The ld. CIT(A), on perusal of the copy of account of M/s Reliance Capital Limited and M/s Sreenath Enterprises in the books of account of the assessee, found that the amounts borrowed by the assessee from M/s Reliance Capital Limited were invested in the partnership firm M/s Sreenath Enterprises. One to one nexus between the amount borrowed from M/s Reliance Capital Limited and that invested in M/s Sreenath Enterprises was found, which fact was further corroborated from the copy of bank account of the assessee with Syndicate Bank. The learned Departmental Representative could not controvert this factual finding returned by the learned first appellate authority with any cogent material or evidence. Once it is accepted that the assessee borrowed funds from M/s Reliance Capital Limited on which it paid interest of Rs.1.82 crores and invested such funds in M/s Sreenath Enterprises, in the capacity of a partner, from where interest income of Rs.2.34 crores was earned, which is chargeable to tax under the head `Profits and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... crores, was disallowed by holding it to be not incurred wholly and exclusively for earning any business income. The Tribunal restored the matter to the file of A.O. with a direction to compute the disallowance u/s.14A by applying the Special Bench order in Daga Capital Management Pvt. Ltd. in 199 TTJ 289 (SB) (Mum.). The assessee contended before the Hon'ble High Court that the Assessing Officer had at no stage invoked section 14A and hence the Tribunal was not justified in considering the applicability of this section. The Hon'ble High Court set aside the tribunal order to that extent. Coming back to the facts of the instant case we find that even no preliminary inquiry was made by the Assessing Officer in respect of disallowable expenditure attributable to the exempt income in view of section 14A. The interest was disallowed as not having been paid for the purpose of business without making any reference to section 14A of the Act. Under such circumstances and respectfully following the judgement of the Hon'ble jurisdictional High Court in Topstar Mercantile Pvt. Ltd. (supra), we hold that this issue cannot be raised for first time before the Tribunal. D. AMOUNT DISALLOWABLE U/S ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... above it has been clearly noticed that the assessee borrowed funds from M/s Reliance Capital Limited and the same funds were invested in M/s Sreenath Enterprises. One to one nexus between the borrowed funds as invested in partnership firm was proved by the assessee. The extent of contribution of capital by partners or the proportion is not determinative of the profit sharing ratio. A partner may have 90% share in the profits of the firm with capital contribution of 10%. So there is no correlation between the extent of capital contribution and share in the profits of the firm. On the other hand, interest income from the firm has always a direct and immediate relation with the capital contribution. Interest is allowed on the capital contributed by a partner in firm irrespective of the profit sharing ratio. If some funds are borrowed and invested in the firm as capital, it is only the relation between the interest paid on such borrowed funds and interest earned from the firm that exists de hors the share in the profits of the firm. Coming back to the facts of the present case, we find that the interest paid by the assessee at Rs.1.82 crores has direct and sole relation with the intere ..... X X X X Extracts X X X X X X X X Extracts X X X X
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