The Income Tax Appellate Tribunal (ITAT) Bangalore, has ruled that that Interest on funds borrowed for investment as capital in a partnership firm are deductible expenditure.
The assessee, Mr. Suresh Sreeram, is a partner in the firm M/s Rama Hi-Power Tech and all income from the partnership firm including interest on capital, remuneration, commission, etc are includible as income under the head ‘Profits & Gains from business or profession’ under section 28(vi) of the Income Tax Act, 1961. He claimed deduction of interest of Rs.23,23,496 on funds borrowed for the purpose of investment as capital in the business of the partnership firm. The Assessee was also engaged in other business like Vehicle hiring business, Commission Income and Consultancy services. The income from these businesses were set off against loss from the business of “Income and salary from the partnership firm” of Rs.23,23,496. Though the computation of income as given above does not reflect this position, the correct position is that is a claim for set off of loss under the same head of income i.e., intra head adjustment which is permitted under section 70 of the Income Tax Act. The Assessing Officer however held that no income has accrued to the assessee from the partnership business during the financial year 2015-16. The expenses do not have any nexus with the other source of income under the head Profits & Gains from business or profession (PGBP) i.e., vehicle hire, consultancy or commissioner expense. Hence, the interest expense was proposed to be disallowed under section 37 of the Income tax Act as the expenses were ‘not laid out wholly and exclusively for the purpose of business or profession’. The assessing officer also held that no interest was received from M/s Rama Hi-power Tech, the partnership business, in which the capital was invested and that the interest expense therefore cannot be allowed as deduction.
Vice President N.V. Vasudevan while allowing the appeal of the Assessee held “. . .absence of earning any interest income on capital from the firm is no bar to claim the interest paid on borrowings for the purpose of contributing capital to the firm by the assessee as deductible expenditure. In such an event there would be loss under the head”PGBP” sub- head “interest, salary from the partnership firm” and the assessee is entitled to set off the said loss against other income under the same head “PGBP”. We are also of the view that the reasoning of the CIT(A) that the interest expense would be expenditure incurred for the purpose of earning income from the partnership firm in the form of share income and therefore the expenditure would be not allowable in terms of Sec.14A of the Act. This reasoning of the CIT(A) is incorrect because admittedly the firm incurred loss and the assessee did not receive any exempt income in the form of share of profits from the firm.”
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