CA H. N. Motiwalla

Query No. 1: (S. 14A r.w.r. 8D in respect of exempt income & Interest from firm) The assessee is partner in the partnership firm. It earns share of profit, remuneration, interest on

the fixed capital as well as current account from the firm.

The assessee had taken loan and invested the same as fixed capital as well as current account of the firm:

a) whether the provision of section 14A r.w.r 8D apply on the exempt income i.e. share of profit from the firm, even though he earns interest from the firm?

b) Would it make any difference if there a loss incurred by the firm?

c) Would it make any difference in the hands of the assessee if no interest is received by the assessee. Though there is not interest received nor any interest has been credited in the books of the firm, but in the partnership deed there is a specific clause for payment of interest on the capital and current account of the firm ?

d) Would it further make any difference, if there is no such clause?


S. 14A provides for disallowance of expenditure in relation to income which does not form part of the total income under the Act. Sub section (2) of S. 14A has to be read with rule 8D which provides the method of calculation of disallowance under this section.

a) Thus, disallowance of expenditure u/s. 14A r.w.s 8D apply to exempted income viz. share of profit from the firm. However, in the Eleventh Edition of Kanga & Palkhiva’s “The Law and Practice of Income tax” at page 728, Shri Arvind P. Datar, Senior Advocate of Madras High Court who edited this edition has observed a under:

“Another controversy could be relating to whether disallowance u/s. 14A can be made in respect of partner’s share of profits. The Revenue may seek to rely on principles similar to those laid down by the Supreme Court in Godrej & Boyce to say that the profits are exempt in the hands of partner. Although not free from doubt, it is submitted that the better view would be to hold that the profits in the hands of partners are exempt only for the purpose of avoiding double taxation. A firm may be assessable as a separate assesse, but in terms of general law, a partnership firm has no separate existence from the partner. The firm pays tax on the profits, and share in the profits is accordingly exempt. But that should not mean that, say interest on partners’ capital can again be reckoned for disallowance u/s. 14A. Under S. 40A specific limitations are placed on interest and remuneration to partners and it is submitted that share in profits of a firm ought not to be considered as exempt income for the purpose of separately attracting disallowance u/s. 14A”

b) In DCIT v. Dipesh Lalchand Shah [143 taxmann. Com 419 (Guj), the facts were the assessee was engaged in business of trading and earned income from salary, profits and gains from partnership firm. During scrutiny, the Assessing Officer passed assessment order assessing income of the assessee as Nil. Principal Commissioner invoked revisionary proceedings on the ground that as per provisions of S. 14A r.w. r 8D expenses pertaining to earning exempt income was required to be disallowed even if no exempt income was earned, The Tribunal observed that income of the assessee from partnership was negative and no dividend income was earned. It thus, held that disallowance u/s. 14A could not be made as assessee did not claim any exempt income in relevant assessment year, The Gujarat High Court held that there was no infirmity in impugned order passed by the Tribunal.

Thus, if the firm is incurring a loss, there may be little or no exempt income to trigger the application of section 14A.

(c&d) A partnership deed is a legal, document containing the terms and conditions on which the partnership is based. It is signed by all the partners. Some provisions cannot be carried out if the partnership deed is silent regarding the interest on capital. It cannot be paid if the partnership deed does not contain any provision in respect of payment of interest. Thus, interest on capital can be paid if there is provision regarding it in the partnership deed. If it is provided in the deed but not paid / provided then, the firm will not be entitled to claim deduction of interest to partner. On the other hand it is possible that a partner would be liable pay tax on interest accrued, unless he has waived his right to claim interest, for the valid reason, before end of the previous year.

Query No. 2: (Presumption as to assets, books of account etc.)

As per section 292C it is presumed that all the books of accounts and other documents found in the course of search at the premises of the assessee belong to the assessee and are true and correct. Under what circumstances the presumption under section 292C can be rebuted?


This section only shifts the burden of proof on the searched person to show that the document did not pertain to him, or that the contents of the document are not true or that the handwriting is not his. Thus, the presumption under this section is rebuttable with the burden of proof on assessee. In CIT v, D, R. Bansal [327 ITR 44 (Chhatisgarh)] some loose papers were found during the search and explanation of the assessee relating to it was that they did not relate to him and that they were planted by accountants, it was decided that in the light of the presumption under section 292C, the assessee version could not be accepted in absence of anything to suggest that these were planted when no police complaint against the accountants had been filed.

Again, in Surendra M. Khandhar v. ACIT [321 ITR 254 (Bom)], a document was located in assessee’s premises during a search showing the advance of an amount made by the assessee, it has to be  presumed to be true, when there was no rebuttal by the assessee, so that the amount would be rightly treated as made out of unaccounted income in the light of presumption under section 292Cof the Act.

Query No. 3: (Definition of the term “Company”) 

Are multiple iteration possible under the first limb of section 2(18)(b)(B)(c) i.e. ‘company to which the clause applies’ in a vertical chain of layers of companies or should be second limb apply?


According to author, multiple interaction is not possible under first limb of S.18(b)(B)(c) of the Act.

S. 2(18) defines “company in which the public are substantially interested” – a company is said to be a company in which the public are substantially interested –

a) —-

aa) —-

b) If it is a company which is not a private company as defined in the Companies Act, 1956 and the conditions specified either in item (A) or in item (B) are fulfilled namely:-

(A) ——-

(B) Share in the company (not being shares entitled to a fixed rate of dividend whether with or without a further right to participate in profits) carrying not less than fifty percent of the voting power have been allotted unconditionally by and were throughout the relevant previous year beneficially held by –

  1. The Government, or
  2. A corporation established by a Central, State or Provincial Act, or
  3. Any company to which this clause applies or any subsidiary company of such company has been held by the parent company or by nominees throughout the previous year.

Explanation –—–

Thus reading the above section, it is clear that it applicability is only to a subsidiary company and not to subsidiary companies.