Rule 8d read with section 14a
This query is : Resolved
19 December 2014
my question is whether interest on capital paid by firm to its partner on their capital contribution shall be consider for purpose of calculating interest other than directly related to investment not forming part of total income?
Thanks in advance!
Thanks in advance!
19 December 2014
int on capital on partner is not to be included.
19 December 2014
thanks for solving query but i need justification of it
22 July 2025
Sure! Here’s a detailed explanation and justification regarding Rule 8D read with Section 14A and whether interest on capital paid by a firm to its partner should be considered for disallowance under Section 14A:
Background:
Section 14A of the Income Tax Act deals with the disallowance of expenditure incurred to earn exempt income (e.g., dividend income which is exempt).
The CBDT introduced Rule 8D to prescribe the method for calculating the amount of expenditure relatable to exempt income.
Under Rule 8D, interest expense related to funds used to earn exempt income can be disallowed proportionately.
Your question:
Is the interest paid by a firm to its partner on their capital contribution considered "interest other than directly related to investment," for disallowance under Section 14A?
Justification:
Interest on capital to partners is not an expense incurred for earning exempt income.
It is a remuneration or return to partners for their capital and is generally treated differently under tax laws.
Interest on capital is allowed as a deduction to the firm under Section 40(b) subject to limits, but it is not an "interest expense" as in borrowing cost from third parties.
Section 14A and Rule 8D apply to expenses directly or indirectly incurred to earn exempt income.
Since interest on capital is paid to partners (owners), it is not a cost of borrowing and not an expense relating to earning exempt income.
Various judicial rulings support this view:
Courts have generally excluded interest on capital paid to partners from Section 14A disallowance because it’s not related to borrowed funds used to earn exempt income.
Summary:
Interest on capital paid to partners is not included in the disallowance under Section 14A and Rule 8D.
Only interest on borrowed funds used for earning exempt income is considered for disallowance.
Background:
Section 14A of the Income Tax Act deals with the disallowance of expenditure incurred to earn exempt income (e.g., dividend income which is exempt).
The CBDT introduced Rule 8D to prescribe the method for calculating the amount of expenditure relatable to exempt income.
Under Rule 8D, interest expense related to funds used to earn exempt income can be disallowed proportionately.
Your question:
Is the interest paid by a firm to its partner on their capital contribution considered "interest other than directly related to investment," for disallowance under Section 14A?
Justification:
Interest on capital to partners is not an expense incurred for earning exempt income.
It is a remuneration or return to partners for their capital and is generally treated differently under tax laws.
Interest on capital is allowed as a deduction to the firm under Section 40(b) subject to limits, but it is not an "interest expense" as in borrowing cost from third parties.
Section 14A and Rule 8D apply to expenses directly or indirectly incurred to earn exempt income.
Since interest on capital is paid to partners (owners), it is not a cost of borrowing and not an expense relating to earning exempt income.
Various judicial rulings support this view:
Courts have generally excluded interest on capital paid to partners from Section 14A disallowance because it’s not related to borrowed funds used to earn exempt income.
Summary:
Interest on capital paid to partners is not included in the disallowance under Section 14A and Rule 8D.
Only interest on borrowed funds used for earning exempt income is considered for disallowance.
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