Disallowance u/s 14A not applicable on Interest Income earned from Negative Capital of Partnership: ITAT [Read Order]

The Ahmedabad bench of the Income Tax Appellate Tribunal (ITAT) held that disallowance under section 14A of the Income Tax Act,1961 does not apply to interest income earned from the negative capital of the partnership.

Shri Dipakbhai Harishchandra Shah,the assesseechallenged the order passed by the Commissioner of Income Tax(Appeals), Gandhinagar (CIT(A)) under section 250(6) of the Income Tax Act, 1961.

During the assessment proceedings, the AO noted that the assessee had taken a large amount of loan of Rs.20,29,568/- and had debited the interest payment of Rs.2,08,055/-.  It was noted that the assessee was a partner in a partnership firm, the profit  & Loss earned from whichwas exempt from income tax under section 10(2A) of the Act.

The AO held that provision of section 14A would come into operation, and accordingly, he disallowed interest expenditure claimed by the assessee amounting to Rs.2,08,055/-.  The CIT(A) after considering the contention of both the assessee and the AO upheld disallowance stating that because the assessee had earned exempt income from the firm, M/s.Shah Patel & Associates, the interest expense claimed by the assessee was disallowable as per section 14A of the Act.

It was observed that the interest paid by the assessee to the firm on account of negative capital balance could not be stated to have incurred to earn any exempt income by way of Profit /Loss from the said firm. 

A Coram comprising of Smt Annapurna Gupta, Accountant Member observed that no disallowance of interest u/s14A of the Act was warranted. It was observed that even machinery provision of computing the disallowance as per the Rule 8D of the Income Tax Rules,1962 becomes unworkable since the formula provided in the said rule for calculating the disallowance of interest is based on the investment made by the assessee for earning exempt income, which negative investment. 

While allowing the appeal of the assessee, the Tribunal held that income earned by partners from firms in the form of profits, which are exempt under section 10(2A) of the Act, attract disallowance under section 14A of the Act. Further deleted the assessee’s claim of disallowance of interest amounting to Rs.2,08,055/- in the present case under section 14A of the Income Tax Act.

To Read the full text of the Order CLICK HERE

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