TaxTMI 
TaxTMI 
2019 (1) TMI 877
X X X X Extracts X X X X
X X X X Extracts X X X X
....ions on registered stock exchanges. During the course of assessment proceedings, on examination of assessee's financial statement, the Assessing Officer observed that the assessee firm has made investment in mutual funds and has earned dividend from such mutual funds which have been claimed as exempt in its return of income. The Assessing Officer held that the partners have made investment in the firm's capital and the said capital is used for making investment in the mutual funds. Therefore, he held that the interest payment on partner's capital is not an allowable expenses against the dividend income which has been claimed as exempt and therefore, invoking provisions of section 14A read with Rule 8D, he worked out the disallowance of int....
X X X X Extracts X X X X
X X X X Extracts X X X X
....A of the Act and consequently, whether interest on partners capital is amenable to section 14A or not in the hands of partnership firm. 11. In order to adjudicate this legal issue, we need to appreciate the nuances of the scheme of the taxation. We note that prior to amendment of taxation laws from AY 1993-94, the interest charged on partners capital was not allowed in the hands 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 ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... the Act. Notably, there has been no amendment in the general law provided under Partnership Act 1932. The amendment to section 40(b) as referred hereinabove has only altered the mode of taxation. Needless to say, the Partnership firm is not a separate legal entity under the Partnership Act. It is not within the purview of the Income-tax Act to change or alter the basic law governing partnership. Interest or salary paid to partners remains distribution of business income. 11.3 Relevant here to refer to decision of Hon'ble Supreme Court in the case of R.M. Chimbaram Pillai (supra) relied upon by the Assessee. Supreme Court has held in the case of R.M. Chidambaram Pillai, etc. (supra) held that: "A firm is not a legal person, even t....
X X X X Extracts X X X X
X X X X Extracts X X X X
....rtner, 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 partners, hence se....
X X X X Extracts X X X X
X X X X Extracts X X X X
...., the revenue is not adversely affected at all by the claim of interest on capital employed with the firm by the partnership firm and partners put together. Thus, capital diverted in the mutual funds to generate alleged tax free income does not lead to any loss in revenue by this action of the assessee. In view of the inherent mutuality, when the partnership firm and its partners are seen holistically and in a combined manner with costs towards interest eliminated in contra, the investment in mutual funds generating tax free income bears the characteristic of and attributable to its own capital where no disallowance under S. 14A read with Rule 8D is warranted. Consequently, the plea of the assessee is merited in so far as interest attributa....