a) A partnership firm was engaged in the business of manufacturing of chemicals. It had claimed deduction of interest paid on partner’s capital.
b) While making assessment, the Assessing Officer observed that investment in mutual funds was made out of interest bearing funds which also included interest bearing partner's capital.
c) The Assessing Officer was of the view that assessee had incurred expenditure including interest expenses which were attributable to earning tax-free dividend income from investment in mutual funds. Thus, the expenditure so incurred on interest was required to be disallowed.
d) Further, the CIT(A) confirmed the action of the Assessing Officer.Aggrieved-assessee filed the instant appeal before ITAT.
The ITAT held in favour of assessee as under:
1) Interest and salary received by the partners are treated on a different footing by the Act and not in its ordinary sense of term. The Section 28(v) treats the passive income accrued by way of interest as also salary received by a partner of the firm as a 'business receipt' unlike different treatments given to similar receipts in the hands of entities other than partners.