Interest to Partners by Firm as per Partnership Deed can’t be disallowed: ITAT [Read Order]

The Jaipur bench of the Income Tax Appellate Tribunal (ITAT) has held that the payment of interest to partners by a partnership firm according to the partnership deed cannot be disallowed by invoking section 14A of the Income Tax Act, 1961.

The assessee is a partnership firm engaged in the business of trading of shares, derivatives, futures, call, and options on registered stock exchanges. The Assessing Officer, while completing the assessment proceedings, observed that the assessee firm has made an investment in mutual funds and has earned a dividend from such mutual funds which have been claimed as exempt in its return of income. He, therefore, held that the partners have made the investment in the firm’s capital and the said capital is used for making the investment in the mutual funds. Therefore, he held that the interest payment on partner’s capital is not an allowable expense against the dividend income which has been claimed as exempt and therefore, invoking provisions of section 14A read with Rule 8D, he worked out the disallowance of interest amounting to Rs. 9,11,054/-.

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The order was confirmed by the first appellate authority.

The department contended before the Tribunal that the payment of interest to the partners by the assessee firm as per the provisions of the partnership deed is not an expenditure which is subject to the provisions of section 14A.

Allowing the second appeal by the assessee, the Tribunal held that “We have heard the rival contentions and perused the material available on record. Following the decision of the Coordinate Bench in case of Quality Industries (Supra), payment of interest to the partners towards the use of the partner’s capital as per the provisions of the partnership deed is held not subject to disallowance under Section 14A read with Rule 8D(ii) of the Act. However, in respect of disallowance under Rule 8D(iii), no specific ground or plea has been taken by the ld AR on behalf of the assessee, hence the same is confirmed.”