Interest claim ag int inc earned on capital ag colateral pp
pooja dedhia
(Querist) 28 February 2014
This query is : Resolved
i have taken the loan on ppf . the finance which is received from on account of collateral of ppf is financed in my partnership firm as a cspital introduced in firm business . Now i calculating the estimate my annual income . i received income from int on capital @12% .This income is taxable in my personal ITR. my question is that can i claim deduction in my ITR file forhthe int paid on loan on the basis of the amt credit in my PPF account .
R.V.RAO
(Expert) 28 February 2014
yes.int.on moneys borrowed for investment in firm's capital by partner is deductible exp.
In the following case law ,the point raised in your query was replied.
Allahabad High Court
Commissioner Of Income Tax vs Shri Aji Prasad on 9 August, 2005
Equivalent citations: (2006) 204 CTR All 292, 2006 283 ITR 142 All
the relevant portion of judgement ony is reproduced below.
......Under Section 67(3) of the Act if any partner borrows any, money for the purpose of investment in the firm and pays any interest on such borrowed money the amount of interest is to be deducted while computing his income chargeable under the head "Profits and gains of business of profession" in respect of the share income of the firm.
Thus a person is entitled to claim deduction of interest only if the interest has been paid on the money borrowed for earning income or for investment as capital in the firm in the case of any partner otherwise not. Interest paid on money borrowed from any source for defraying the personal expenditure is not to be allowed as deduction while computing the income chargeable.
apart from this tax on borrowed money advantage(in your personal tax issue),you also enjoy, a share in firm's profit after tax advantage, because the int. paid to partner on his capital is deductible exp.for the firm and you are sharing the firm's profits after such admissible deduction.
your firm gets taxed @30% after charging int,on partner's capital(among other exp)@say 12%int.to each partner
if personally u r in 30%tax slab ,this income is nett,after charging int.on borrowed capital invested in firm.
pooja dedhia
(Querist) 01 March 2014
thank you so much to show the light in knowlege
R.V.RAO
(Expert) 01 March 2014
you are welcome.
Vineet
(Expert) 03 March 2014
Well, provisions of section 67, quoted by expert Mr Rao are no more applicable since 1-4-1993. Now, the interest income from partnership firm is taxed under the head business income and not under Other Sources.
If you can show that the borrowed amount has been introduced as interest bearing partners capital, you are entitled for deduction of interest paid on borrowing. The AO may take a view that since partner capital also entitles you exempt income as share of profit of firms, provisions of section 14A are applicable. If you can factually prove your case regarding borrowings earning interest from firm, your case is very strong.
R.V.RAO
(Expert) 04 March 2014
Thank you sri vineetji.
you put an interesting poser. while it is so, iam sure, THE assessing officers cannot be indifferent to the following tax rationale and need for a caUtious application of sec14A
" ...In the case of dividend income, the scheme of the Income-tax Act is to collect tax at 15% plus applicable surcharge at the time of distribution. It is for this reason that tax is not levied in the hands of the investor.
Similarly, the firm is required to pay tax at 30% plus applicable surcharge. For this reason, the balance of profit apportioned to partners is exempted in the hands of the partners.
Similar exemption is given u/s.10(38) in respect of long term capital gains on which STT is paid. This exemption is granted not as an incentive but because the tax is levied at source. Therefore, there is no logic in disallowing expenditure u/s.14A in such cases where tax is collected at source. It is, therefore, suggested that the section should be suitably amended or CBDT should clarify that S. 14A should not be invoked where income is received by the assessee after payment of tax under the Income-tax Act...."
source:http://www.bcasonline.org/articles/artin.asp
i like to hear from you any thing latest on this ,as it helps the needy here and enlightens our learned LCI members.
Vineet
(Expert) 04 March 2014
Dear Rao Sahib
What is stated in article posted on BCAS site is a wishlist, an argument which has so far been rejected by courts. In fact after Bombay High Court decision in the case of Godrej & Boyce where constitutional validity of rule 8D (the harshest presumptive rule in taxation statue) also upheld and Supreme Court upholding proximity clause as sufficient to invoke section 14A, revenue authorities do not hesitate in confirming disallowance u/s 14A with slightest nexus with any tax exempt income be it dividend, share in profit from firms, interest from tax free bonds etc.
pooja dedhia
(Querist) 28 March 2014
rao , vineet , i am very thankful to you . you have add the value in my knowlege.
pooja dedhia
(Querist) 28 March 2014
can partner claim interest payable or paid @15% in his individual return against the income of interest on partner capital?
if yes pl support by explanation or section or case laws.
