claim of interest against exempt share income in the hands of a partner

[sai prasad]

A partner in a firm borrows money and invested in the firm.The firm doesnot pay interest but discloses income and pays tax in its hands u/s.167B.Whether interest paid by the partner on borrowed capital for the year is allowable as deduction in view of payment of tax by the firm on the income. The firm ,in law and for incometax purposes, is only compendious name given to partners.Whether restriction ui/s.14A comes in the way of claim by partner in view of the principle that payment of tax by the firm tantamounts to payment by its partners.An opinion is requested from my esteemed colleagues.

[probal_shome]

I have not looked up the case law on the subject but on first principles - a firm and a partner are different entities under the Act. The partner has borrowed money to receive a stream of income - his share of profits under the Act. That stream of income is admittedly not chargeable to tax. Then why should s. 14A not apply? Why should the interest on the borrowed moneys not be disallowed?

The only argument is that as the firm has paid tax on the profits, the distribution to the partners should be considered to have borne tax. However, this flies in the face of s. 10 (2) which declares that the distribution is exempt from tax.

Of course, the argument was made in the context of dividend - that dividend income should be regarded as having borne tax as DDT is paid - and accepted in Mafatlal Holdings 85 TTJ 821 (Mum).

Of course, the case of a partnership is far superior to that of a company. So it is definitely worth arguing IMHO.

Regards,

Probal.

[PANKAJ JAIN]

The ratio laid down by the SC in the case of SA Builders (158 Taxman 74) should apply in this case. The SC has observed that the Intrest paid on amounts advanced to the subsidiary is allowable deduction as it is no longer required to prove the nexus between the borrowed funds and interest free advances as long as the amounts are advanced to the sister concerns and subsidiaries for purposes of their business and has not been utilized for the personal benefit of Directors. 

IMHO the above decison of SC should apply in your case.

Best Regards, :)

[patil]

I think question is in context of sec 14A which provide that no deduction shall be allowed in respect of expenditure incurred by the assessee in relation to income which does not form part of total income under the Act.

S. A. Builders SC decision will only establish that the borrowing was for business purpose however that is not enough. The further question is whether the borrowing is to earn taxable income or tax-free income.

I am of view that the case made by the Querist i.e. that the profits made by the partnes though tax-freee should be considered to have suffered tax in firms' hands is a sound and good argument. Otherwise you are streching the fiction of sect 14A beyond limit. Ultimately, consider what is the objective of legislature in enacting 14A. That assessee should not get unfair advantage.

Here he is not getting unfair advantage because if you merege firm abd partner what you have is that expenditure has been incurred by partner and income THEREFROM has been earned by firm which is taxable. If firm had borrowed moneys and invested in business you would have granted deduction, then why distinction should be made when borrower is partner but beneficiary is firm<

Patil.