section 14A

[satbir singhwahi]

proprietorship firm has 900 lac capital and has invested in partnership firms 450 lacs and has raised unsecured loans of 200 lacs. The interest paid on unsecured loans is claimed as expenditure against trading profit on sale/purchase of land.The investment in partnership firms of 450 lacs , the profit share is claimed as exempt. The A.O. is insisting to disallow interest on unsecured loans u/s 14A.Is he correct when sufficient capital is there.

[Mukesh Kumar]

From the face of the query, it appears that the AO is correct in insisting disallowing interest towards income which is not forming part of total income. There are various case laws under section 14A pertaining to dis allowance of expenditure towards exempted income. 

[DEV KUMAR KOTHARI]

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In case there is evidence of investment in firm out of capital an no use of borowed funds, then any interest cannot be disallowed as incurred in relation to exempt income.

Furthermore, share in profit is received and treated as exempt only because the firm has already paid tax on it. Make comparison with salary and interest received which is taxable in hands of partner because firm has not paid tax on it. The share in profit is exempt, only because the firm has paid tax. Therefore, the share in profit is not an income which is exempt in overall context of IT Act.

Therefore, Section 14A is not at all applicable. 

[CAGOPALJI AGRAWAL]

With utmost regards to Kothari Ji, I differ with the second para of the opinion as to my view if borrowed funds have been invested in firm then provisions of section 14A would apply as the share in firm does not take part of total income of the assessee by virtue of section 10(2A). Taking the similar case of dividend which is exempt but already suffer the DDT hence the analogy that the share of partner is already taxed, could not apply.

Of course, if the partner is getting interest on this investment then the position may differ.

AI Summary

Disallowance of expenditure for exempt income under section 14A applied where investments are funded by borrowed money.
The AO proposes disallowing interest under section 14A as attributable to exempt income from partnership profit. One respondent supports disallowance per precedent; another argues no disallowance if investments were from capital and that a partner's profit share is not exempt in the aggregate tax context; a third respondent rejects that view, treating the partner's profit as excluded income and concluding that use of borrowed funds to make the investment would invoke section 14A, subject to different treatment where the partner receives interest on the investment.