TaxTMI 
TaxTMI 
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.
section 14A
30 Aug 2010 
3 Replies 
1811 Views Asked by
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. (AI Summary)
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. (AI Summary)