MOTRAM G. CHAWLA,MUMBAI vs. DCIT CIR 24(2), MUMBAI

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ITA 2861/MUM/2015Status: DisposedITAT Mumbai27 July 2016AY 2010-113 pages

In favour of the assessee: the assessee's appeal was allowed. From the AI summary of this appeal.

AI SummaryAllowed

What did the Tribunal hold?

The Tribunal held that the interest paid by the assessee was on loans taken from the firm and not for earning exempt income, hence the disallowance under Section 14A was not justified. The disallowance of interest paid on borrowings against interest income was also found to be unjustified.

What were the facts?

The assessee, a partner in a firm, was disallowed interest expenses under Section 14A by the AO. The assessee also earned interest income from loans given and paid interest on borrowings, which was also disallowed by the AO.

What were the issues?

Whether interest paid on loans from a firm is disallowable under Section 14A when it is not for earning exempt income. Whether interest paid on borrowings can be disallowed against interest income earned.

Which sections of the Income-tax Act were involved?

Section 14A,Section 57(iii)

AI-generated summary — verify with the full judgment below

Income Tax Appellate Tribunal, “SMC”, BENCH MUMBAI

Before: SHRI R.C.SHARMA

Hearing: 12/07/2016Pronounced: 27/07/2016

O R D E R This is an appeal filed by the assessee against the order of CIT(A)- Mumbai, for the assessment year 2010-2011.

2.

In this appeal the assessee is aggrieved for disallowance u/s 14A of of Rs.2,85,383/- being interest charged by Mamta Enterprises, in which assessee is a partner, had debit balance in the capital account.

3.

Rival contentions have been heard and record perused. The assessee is a partner in the firm M/s Mamta Enterprises. During the year under appeal the firm charged interest of Rs.20,79,259/- from its partners and shown the same as income in the profit and loss account as interest from partners. Out of Rs.20,79,259/- the assessee paid Rs.2,85,383/- on the debit balance standing in the capital balance. The assessee also received profit of Rs.2,06,868/- from the above firm which was shown as 2 exempt u/s.10. The assessee claimed interest of Rs.2,85,383/- debited by M/s Mamta Enterprises. However, the AO has disallowed interest of Rs.2,85,383/- u/s.14A.

4.

I do not find any merit in the action of AO, insofar as interest was paid on the loan taken from the firm and it was not an expenditure incurred for earning any exempt income from the partnership firm. Accordingly, I do not find any merit in the disallowance so made by the AO. I also found that firm has paid tax on the interest charged from its partners. There cannot be double tax on the same income.

5.

During the year under assessment the assessee has earned interest of Rs.4,23,547/- from loans and advances given by him. The assessee also paid interest of Rs.2,24,254/- against the interest income of Rs.3,63,973/- and has shown net interest income of Rs.1,39,715/- and declared the same under the head income from other sources. The AO also disallowed interest of Rs.2,24,254/-.

6.

I found that the AO has applied the provision of section 57(iii) and disallowed the same mentioning in the assessment order that the assessee has failed to establish that the loans/borrowings were made in order to earn interest income. From the profit & loss account I found that the assessee has received interest of Rs.3,63,973/- from M/s Shree Laxmi Enterprises to whom the assessee has advanced the money. Against the loan of Rs.20,40,000/- received by the assessee, assessee paid interest of Rs.2,24,254/- to the loan parties. The amount on which interest was

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