Quality Industries v. Jt. CIT

INCOME TAX ACT, 1961

--Disallowance under section 14A--Interest paid on partner's capital and to outsidersInvestment made by firm in mutual funds earning exempt income. ----Where assessee-firm made investment in mutual fund earning exempt income and was paying interest on partners capital as well as borrowed funds, AO was not justified in disallowing partly interest paid on partners' capital as it bears the character of own capital of firm which requires no disallowance and same was taxable in partners hand. Case was remanded back to AO to recompute disallowance under section 14A with respect to borrowed capital.--Assessee partnership firm had made investment in mutual funds. Assessee claimed deduction of interest paid to partners and also to outside parties. The income of assessee inter alia included tax-free dividend income from mutual fund, in respect of which assessee made no disallowance under section 14A. AO disallowed in part interest paid on partner's capital and to outsiders on the ground that investment in mutual fund was made out of interest bearing capital. According to assessee, interest on partner's capital was taxable in hands of partners and disallowance will lead to double taxation in hands of partners as well as firm. Held : Interest or salary paid to partner's remains distribution of business income. However, interest paid to outside parties cannot be treated at par with the interest payable to partners and it would be subjected to disallowance under section 14A with rule 8D(3). Therefore, the matter was remanded back to AO for recomputing disallowance under section 14A read with rule 8D.

Income Tax Act, 1961, Section 14A

REFERRED : CIT v. R. M. Chidambaram Pillai (1977) 106 ITR 292 (SC) and CIT v. Ramniklal Kothari (1969) 74 ITR 57 (SC)

FAVOUR : Matter remanded