20 February 2016
A proprietorship is converted into partnership firm, the new partner is paying an amount of goodwill to new partner. Can new partner get any benefit of interest,he is paying on loan (loan was taken to pay part goodwill amount).??
21 February 2016
The new partner has borrowed some money for paying goodwill in the firm he has joined. As per Income Tax Act 1961, the share of profit of a partner is not subject to tax in the partner's hand. Therefore the investment is made for earning non taxable income. Section 14 A of the Income Tax Act 1961 reads "14A. Expenditure incurred in relation to income not includible in total income.—For the purposes of computing the total income under this Chapter, no deduction shall be allowed in respect of expenditure incurred by the assessee in relation to income which does not form part of the total income under this Act."
Hence the interest paid on the loan taken by the new partner for investment in the partnership firm cannot be claimed as deduction.
22 February 2016
I have different view. Since the interest and partners remuneration is taxable as business income, proportionate interest is deductible from the interest and remuneration to be received from the firm.
26 February 2016
The argument advanced by Expert Soumitra Basu is acceptable. However, the querists clearly states that the money is borrowed to pay goodwill and not invest as capital in the firm. Hence no set-off will be available against interest earned, but can be set off proportionately against remuneration. However, my experience with Section 14 A, is that at the assessment and occasionally first appeal stage, the disallowance is on the whole interest. Since it is matter of litigation, should an assessee take the benefit - cost benefit analysis needs be done. Unless the remuneration is quite high (then the firm has a huge profit), taking a proportionate deduction for interest paid on borrowed funds for investment in Goodwill, is not advisable.
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