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Urgent query

CA Rajesh Prajapati (Practice) (202 Points)

17 December 2013

Mr X has taken a personal loan for Rs 50 lacs & invested as a capital in a partnership firm. Mr X is receiving interest on capital & 6% from that partnership firm. Mr X is also paying the interest on loan taken from the bank @ 13.25%.

Now the question is-- Whether Mr X can claim deduction of interest paid on loan from bank from the income from interest on capital in his personal ITR. Is there any tax planning possible. Kindly Reply

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7 Replies

ABHISHEK JAIN (STUDENT) (25 Points)
Replied 17 December 2013

if spot rate is 1 UKP=$1.5763 and 90 days forward rate is 1 UKP = $1.5436 then what is the forward premium on $ ?

please solve this query as i m confused getting two answers 8.59% and 8.41%.

Ajay (CA Job) (512 Points)
Replied 17 December 2013

Dear Rajesh

As the interest from the firm received by partner is offerred for taxation u/s 28 as business income, deductions u/s 32 to 37 are available to the partner. So, the partner can claim deduction of interest paid on borrowed funds which are used to invest as capital in the firm u/s 36(1)(iii). However, you may have to prove a direct nexus between the borrowed fund and the capital invested, that is to say, if you can prove that the funds so borrowed has been fully invested in the firm as capital, then you can claim interest paid as deduction. You can refer the relevant ITAT case law ACIT v. Delite Enterprises (P.) Ltd. (2011) 135 TTJ 663 (Mumbai - Tribunal) in which even the possibility of disallowance u/s 14A has been struck down.

In your case, since the interest paid is more than the interest earned, it may result in business loss in the hands of the partner which can be carried forwarded for 8 years. Also, proving the nexus between borrowed fund and invested fund becomes more important in your case since the interest paid and claimed would be less than the interest received and offered for taxation.

Regards

Ajay