Interest On partenrs Capital

This query is : Open

Neeraj (Querist)
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09 December 2009 Dear Member
I have an query regarding Partners capital Interest.
In Deed it was mentioned that 11% interest was allowed to partners.
During the year partnership firm did invested of sum amount in MF which is not its primary business and earned X amount. On that amount they paid Capital Gain tax.
During the year firm paid Interest To partners as per the Partnership deed.
Now AO is saying that he ll disallowed the payment of interest to partner on the ground that it is not a business activity.

Thanks & Regards
Niraj Chordia

CA SURENDRA KUMAR RAKHECHA

CA SURENDRA KUMAR RAKHECHA (Expert)
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09 December 2009 If interest is paid to earn tax free income; then it is disallowable.

- Section 14A of the Income Tax Act.

If the amount of investment was made out of business profits and the partners already invested money as capital ( say in the beginning of the year); then it can be established that there is no nexus between income earned and interest paid.

Further; since you have paid tax thereon hence it cannot be said that to avoid tax; you have invested.

Although I am confident; still more views are invited.

CA Surendra Rakhecha
Surat

CA. Bikash Bogi

CA. Bikash Bogi (Expert)
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11 December 2009 I am agree with Surendra ji

If own fund is enough to cover the investments then the AO cant disallow it.....as per Bombay high court in Reliance Utility case.....

Since you had paid tax also on capital gain ....there is no such motive to avoid tax.....

your case is also not covered by Section 14A..hence Special Bench Decesion in case of daga Capital not apply

Overall No disallowance.

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