In Syntholab Chemicals and Research Office v. ACIT, the Mumbai bench of the ITAT held that interest amount paid by the Firm to its partners cannot be disallowed by applying section 14A of the Income Tax Act.
During the relevant assessment year, the assessee-Firm claimed deduction on interest expenditure. The AO completed assessment by invoking section 14A r/w Rule 8A and held that the payment of interest to the partners was not interest expenditure and therefore it must be disallowed. He was of the opinion that it was one way of distributing profits of the business of the firm and the same is assessable in the hands of the partners under section 28(v) of the Income Tax Act.
On appeal, the first appellate authority upheld the original order and therefore, the assessee approached the Tribunal on second appeal.
The bench noticed that in the case of Quality Industries, the Tribunal held that both the Firm and the partners are not separate legal entities and therefore, the interest amount paid to the partners by the Firm cannot treated at par with the other interest payable to outside parties.
Relying on the above decision, the bench allowed assessee’s appeal and said that interest expenditure incurred by the partnership firm on account of interest paid to the partners cannot be disallowed under provisions of section 14A of Income Tax the Act.
Read the full text of the Order below.
