Business Expenditure U/s 36

[HIMANSHU JARIWALA]

Mr. X has received remuneration from partnership firm. Which he treated as his business income u/s 28(v). Against this income he claimed interest exps. which he paid on unsecured loan from from various parties. The A.O. wants to disallow this interest exps arguing that remuneration received is salary income and interest exps can not be allowed. Can Mr. X Claim Intrest paid on unsecured loan as exps against remunuration received from partnership firm which is treated as business income U/s 28(v). Pls. advise... Pls indicate case law if any?

[CA Rachit Agarwal]

Section 28(v) has following parts-

1. Interest- Earned from the Capital Contribution made to Partnership Firm

2. Salary- Earned from his efforts and managing business.

It is definite that to earn salary, no interest payments required. Hence interest payments not be allowed as deductions.

However as soon as salary and interest both comes under the perview of "Income from Business/Profession", hence both could be netted off (i.e Salary from firm and interest payments to firm) to compute the income from said head.

AI Summary

Deductibility of interest depends on whether remuneration is business income allowing netting with interest expenses. Deductibility of interest on unsecured loans against remuneration from a partnership firm hinges on the payment's character. If the remuneration is treated as salary earned from personal efforts, interest lacks the necessary nexus and is not deductible. If the payment and the interest both constitute income from business or profession, the interest expense may be netted against that business income when computing taxable profit.