TaxTMI 
TaxTMI 
2017 (4) TMI 967
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.... long-term capital gain of Rs. 19.44 lakhs, that it had claimed exemption u/s. 10 (34) and 10 (38) respectively. He applied provisions of section 14A read with Rule 8D (ii) of the Income Tax Rules, 1962 (Rules) and disallowed Rs. 38.78 lakhs under the head interest expenditure and 0.5% of average value of investment at Rs. 1.78 lakhs. 3. Aggrieved by the order of the AO, the assessee preferred an appeal before the First Appellate Authority (FAA).Before him,it was argued that assessee had debited interest expenditure of Rs. 65.99 lakhs, that it had paid interest of Rs. 4.34 lakhs on the loan amount to the mother of the partners who had kept her funds with the firm for more than 10 years, that interest was being credited to her account for last for many years, that she had not brought in any funds after 01/04/ 2006,that no fresh loans were received by the assessee, mother of the partners during the year under consideration, that no presumption could be raised that the said loan amount was utilised by the assessee for making investment that would generate exempt income, that it had paid interest to the partners aggregating to Rs. 64.95 lakhs on their capital at the rate of 12% was ....
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.... interest-bearing funds, that interest expenditure was attributable to the investment, including the investment made during the year and also investment made in the past. Distinguishing the cases referred by the assessee, the FAA held that case under consideration was of a firm and not of the partners, that the issue involved was as to whether the interest expenditure incurred by the firm on the borrowed funds, including the partners interest-bearing capital utilised for making investment, would be allowable as deduction in view of the provisions of section 14A of the Act, that in the cases relied upon by the assessee for about reliability of interest expenditure incurred on borrowed funds used for making capital contribution to the firm in the hands of the partners who had received share of the profit from the firm and also remuneration/salary from the firm,that in those cases the tribunal had held that interest expenditure incurred by partner on funds borrowed for making investment in the firm as capital was allowable as deduction against salary/remuneration and interest received from the partnership firm, that the deduction of interest was not allowable against the share of prof....
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....nds of partnership firm while it was simultaneously taxable in the hands of respective partners. An amendment was inter alia brought in by the Finance Act 1992 in section 40(b) to enable the firm to claim deduction of interest outgo payable to partners on their respective capital subject to some upper limits. Hence, as per the present scheme of taxation, the interest payment on partners capital in essence is not treated as allowable business expenditure except for the deduction available under S. 40(b) of the Act. 11.1 Ostensibly, with effect from AY. 1993-94, partnership firms complying with the statutory requirements and assessed as such are allowed deduction in respect of interest to partners subject to the limits and conditions specified in section 40(b) of the Act. In turn, these items will be taxed in the hands of the partners as business income under s. 28(v). Share of partners in the income of the firm is exempt from tax u/s. 10(2A). Thus, the share of income from firm is on a different footing than the interest income which is taxable under the business income. 11.2 Similarly, we note that interest and salary received by the partners are treated on a different footin....
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....tner from the firm is business income and, therefore, expenses incurred by the partners for the purpose of earning this income from the firm are admissible as deduction from such share income from the firm in which he is partner. Thus, the 'partnership firm' and partners have been collectively seen and the distinction between the two was blurred in the judicial precedents even for taxation purposes. 11.4 Section 4 of the Indian Partnership Act 1932 defines the terms partnership, partner, firm and firm name as under : "Partnership" is the relation between persons, who have agreed to share the profits of a business, carried on by all or any of the partners acting for all. Persons who have entered into partnership with one another are called individually 'Partners' and collectively a 'firm' and the name under which their business is carried on is called the 'firm name." Thus, it is clear from the above that firm and partners of the firm are not separate person under Partnership Act although separate unit of assessment for tax purposes. There cannot therefore be a relationship inferred between partner and firm as that of lender of funds (capital) and borrowal of capital from the par....