NATHALAL R CHAMRIA, MUMBAI V. ITO 1(1)(4), MUMBAI

ITA 1748/MUM/2013

• Counselvise Citation: 174819914 RSA 2013
• Duration Of Justice: 2 year(s) 3 month(s) 25 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 30-06-2015
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: B
• Next Hearing Date: 28-05-2015
• Assessment Year: 2009-2010
• Appeal Filed On: 05-03-2013
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: PAVAN KUMAR BEERLA SR
• Keywords: Salary income; Earning of tax free income
• Section: 14A

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL, MUMBAI BENCH B, MUMBAI BEFORE SHRI G.S. PANNU, ACCOUNTANT MEMBER AND SHRI SANJAY GARG, JUDICIAL MEMBER ITA NO.1748/M/2013 ASSESSMENT YEAR: 2009-10 SHRI NATHALAL R. CHAMRIA, B-401, SHREE DARSHAN, PLOT NO.45, NR. TELEPHONE EXCHANGE, MHADA, FOUR BUNGALOWS, ANDHERI (W), MUMBAI - 53 PAN: AERPC 0335B VS. INCOME TAX OFFICER, WARD- 1(1)(4), AAYAKAR BHAVAN, MAHARSHI KARVE ROAD, CHURCHGATE, MUMBAI. (APPELLANT) (RESPONDENT) PRESENT FOR: ASSESSEE BY : SHRI RUSHABH MEHTA, A.R. REVENUE BY : SHRI PAVAN KUMAR BEERLA, SR.A.R. DATE OF HEARING : 28.05.2015 DATE OF PRONOUNCEMENT : 30.06.2015 O R D E R PER SANJAY GARG, JUDICIAL MEMBER: THE PRESENT APPEAL HAS BEEN PREFERRED BY THE ASSESS EE AGAINST THE ORDER DATED 25.10.2012 OF THE COMMISSIONER OF INCOME TAX (APPEALS) [(HEREINAFTER REFERRED TO AS CIT(A)] RELEVANT TO ASSESSMENT YEAR 2009-10. 2. THE ASSESSEE IN THIS APPEAL HAS AGITATED THE CON FIRMATION OF DISALLOWANCE OF EXPENSES OF RS.26,41,896/- MADE BY THE ASSESSING OF FICER (HEREINAFTER REFERRED TO AS THE AO) UNDER SECTION 14A OF THE INC OME TAX ACT R.W.R. 8D OF THE I.T. RULES. THE BRIEF FACTS OF THE CASE, AS EXTRACTED FROM THE IMPUGNED ORDER ARE THAT DURING THE ASSESSMENT PROCEEDINGS, THE AO NOTED THA T THE ASSESSEE/APPELLANT HAD INVESTED BORROWED FUNDS IN PARTNERSHIP FIRMS, I NCOME FROM WHICH BY WAY ITA NO.1748/M/2013 SHRI NATHALAL R. CHAMRIA 2 OF SHARE OF PROFIT IS EXEMPT UNDER THE ACT. THE AO , THEREFORE, HELD THAT THE PROVISIONS OF SECTION 14A R.W.R. 8D WERE APPLICABLE TO THE CASE OF THE ASSESSEE. THE AO CONSIDERED THE ENTIRE INVESTMENT MADE IN THE FIRMS FOR COMPUTATION OF DISALLOWANCE UNDER RULE 8D OF THE I.T. RULES. HE, A CCORDINGLY, DISALLOWED A SUM OF RS.26,41,896/- AS EXPENSES UNDER SECTION 14A OF THE ACT READ WITH RULE 8D OF THE I.T. RULES. 3. BEFORE THE LD. CIT(A), THE ASSESSEE SUBMITTED TH AT HE HAD USED THE BORROWED FUNDS FOR INVESTMENTS FROM WHICH NO TAXABL E INCOME HAD BEEN EARNED BY THE ASSESSEE. IT WAS FURTHER SUBMITTED TH AT THE TOTAL INVESTMENTS AMOUNTING TO RS.55,24,964/- WAS MADE FROM BORROWED FUND. HENCE, APPLYING THE RATE OF INTEREST 12% ON THE SAID BORROWED AMOUN T, THE INTEREST EXPENDITURE WHICH WAS LIABLE FOR DISALLOWANCE SHOULD HAVE BEEN TO THE EXTENT OF RS.6,62,996/-, WHEREAS, THE ASSESSEE HAD ALREADY SU O-MOTO MADE A DISALLOWANCE OF RS.7,06,954/- IN THE RETURN OF INCO ME. THE ASSESSEE FURTHER SUBMITTED THAT EVEN OTHERWISE THE INVESTMENT IN PARTNERSHIP FIRMS SHOULD NOT BE CONSIDERED AS ASSET S GENERATING EXEMPT INCOME AS THE PROFIT RECEIVED FROM PARTNERSHIP FIRM WAS AL READY TAX SUFFERED INCOME AND FURTHER DISALLOWANCE U/S 14A WOULD AMOUNT TO DO UBLE TAXATION. THE ASSSESSEE FURTHER CONTENDED THAT INTEREST AMOUNTIN G TO RS.53,96,432/ WAS EARNED DURING THE YEAR ON CAPITAL INVESTED IN FIRMS AS AGAINST THE TOTAL INTEREST EXPENDITURE OF RS. 61,03,686/-. THE ASSESSEE CONTEN DED THAT THE DISALLOWANCE OF THE NET INTEREST EXPENDITURE OF RS.7,06,954/- HA D ALREADY BEEN MADE IN THE COMPUTATION OF TOTAL INCOME ON ACCOUNT OF LACK OF N EXUS OF INTEREST EXPENSES AGAINST THE INTEREST INCOME EARNED. BESIDES THAT TH E ASSESSEE ALSO SUBMITTED THAT THE INVESTMENT IN FIRMS WAS ALSO MADE OUT OF T HE OWN/INTEREST FREE FUNDS. THE ASSESSEE THEREFORE CONTENDED THAT THE FURTHER D ISALLOWANCE U/S 14A WAS NOT ATTRACTED. ITA NO.1748/M/2013 SHRI NATHALAL R. CHAMRIA 3 4. THE LD. CIT(A), HOWEVER, HELD THAT SINCE THE SHA RE FROM PROFIT OF FIRM WAS EXEMPT INCOME IN THE HANDS OF THE ASSESSEE, HEN CE, THE SAME LOGIC COULD BE APPLIED IN THE CASE OF DIVIDEND INCOME AND HENCE THE PROVISIONS OF SECTION 14A WOULD BE APPLIED ON BOTH THE ASSETS. HE THEREFO RE UPHELD THE DISALLOWANCE MADE BY THE AO. AGGRIEVED BY THE ORDER OF THE LD. C IT(A), THE ASSESSEE HAS COME IN APPEAL BEFORE US. 5. WE HAVE CONSIDERED THE RIVAL CONTENTIONS AND HAV E ALSO GONE THROUGH THE RECORD. AS PER SECTION 4 OF THE INDIAN PARTNERSHIP ACT, PARTNERSHIP MEANS THE RELATION BETWEEN THE PERSONS WHO HAVE AGREED TO SHA RE THE PROFITS OF THE BUSINESS CARRIED ON BY ALL OR ANY OF THEM ACTING FO R ALL. THE PROFITS SO EARNED BY THE FIRM ARE TAXABLE IN THE HANDS OF THE FIRM. T HE SHARE OF PROFIT DISTRIBUTED TO THE PARTNERS IS MADE EXEMPT UNDER SECTION 10(2A) OF THE INCOME TAX ACT TO AVOID DOUBLE TAXATION OF THE SAME INCOME. THE PARTN ERS AS PER THE DEED OF PARTNERSHIP MAY CONTRIBUTE CAPITAL IN THE PROPORTIO N AS AGREED BETWEEN THEM AND SHARE PROFIT OF THE FIRM. APART FROM HIS SHARE OF PROFIT, A PARTNER AS PER THE DEED MAY EARN INTEREST ON CAPITAL CONTRIBUTED AND H E MAY ALSO EARN SALARY FORM THE FIRM FOR HIS WORK AS PER THE DEED OF THE FIRM. THE SALARY INCOME AND THE INTEREST INCOME RECEIVED BY THE PARTNER ARE NOT EXE MPT AS THE SAME ARE TAXABLE UNDER THE PROVISIONS OF THE ACT. THE INTEREST EXPEN DITURE INCURRED TOWARDS CAPITAL OF THE FIRM IS AN ALLOWABLE EXPENDITURE U/S 36(1)(III) OF THE ACT. UNDER SUCH CIRCUMSTANCES THE DISALLOWANCE UNDER SECTION 1 4A CAN BE APPORTIONED IN RELATION EXEMPT INCOME ONLY AND NOT IN RELATION TO OTHER INCOMES WHICH OTHERWISE ARE TAXABLE. UNDER THE CIRCUMSTANCES, THE INTEREST INCOME EARNED BY THE ASSESSEE ON THE CAPITAL CONTRIBUTED IS REQUIRED TO BE REDUCED FROM THE INTEREST EXPENDITURE INCURRED ON THE FUNDS CONTRIBU TED FOR CAPITAL OF THE FIRM. EVEN OTHER TAXABLE INCOME EARNED BY THE ASSESSEE HA VING RELATION TO THE CAPITAL CONTRIBUTED BY THE ASSESSEE IS REQUIRED TO BE TAKEN INTO CONSIDERATION WHILE ITA NO.1748/M/2013 SHRI NATHALAL R. CHAMRIA 4 WORKING OUT THE DISALLOWANCE OF EXPENDITURE U/S 14A IN RELATION TO EXEMPT INCOME EARNED IN THE SHAPE OF SHARE FROM PROFITS OF THE FIRM. THE ASSESSEE IN THIS CASE, AS HAS BEEN NOTED BY THE AO, HAS INCURRE D TOTAL EXPENDITURE OF RS.61,03,386/- ON HIS BORROWINGS WHICH WERE UTILIZE D FOR INVESTMENTS MADE IN FIRMS, FDS AND OTHER DEPOSITS. THE ASSESSEE HAS EAR NED TOTAL INTEREST INCOME OF RS. 5427865/- OUT OF WHICH THE INTEREST ON CAPITAL CONTRIBUTED IN FIRMS WAS RS. 5396432/- . THE ASSESSEE IN HIS COMPUTATION OF TOTA L INCOME HAS CLAIMED THE INTEREST EXPENDITURE OF RS5396432/- ONLY AND HAS SU O-MOTO DISALLOWED THE ENTIRE REMAINING EXPENDITURE OF RS.706954/-. THE AO WHILE APPLYING THE PROVISIONS OF RULE 8D(II) HAS FAILED TO REDUCE THE CAPITAL/ EXPENDITURE INCURRED BY THE ASSESSEE FOR EARNING OF THE TAXABLE INTERES T INCOME NOT ONLY ON CAPITAL CONTRIBUTED IN FIRMS BUT ALSO ON OTHER TAXABLE INVE STMENTS MADE. IN OUR VIEW, UNDER THE CIRCUMSTANCES, THE INTEREST DISALLOWANCE U/S 14 A IN RELATION TO EXEMPT INCOME CAN NOT IN ANY WAY INCREASE THAN THE NET INTEREST EXPENDITURE, WHICH THE ASSESSEE HAS ALREADY SUOMOTO DISALLOWED I N HIS COMPUTATION. IN OUR VIEW, NO FURTHER DISALLOWANCE OF INTEREST EXPENDITU RE WAS WARRANTED IN THIS CASE. FURTHER KEEPING IN VIEW THAT IN RELATION TO T HE NET INTEREST EXPENDITURE, THE ASSESSEE HAS INCURRED SOME OF THE EXPENDITURE FOR E ARNING OF TAXABLE INTEREST INCOME FROM OTHER INVESTMENTS, FDS ETC. AND FURTHER TAKING INTO CONSIDERATION THE CONTENTION OF THE ASSESSEE THAT HE HAS ALSO US ED HIS OWN FUND FOR THE PURPOSE OF INVESTMENT AND ALSO TAKING INTO CONSIDER ATION THE NATURE OF INVESTMENTS IN FIRMS, NOT REQUIRING ANY SPECIFIC AD MINISTRATIVE EXPENSES ON DAY TO TO DAY BASIS, IN OUR VIEW NO FURTHER DISALLOWANC E IS WARRANTED UNDER RULE 8D(III) ON ACCOUNT OF ADMINISTRATIVE EXPENSES EXCEP T THE OVERALL SUO-MOTO DISALLOWANCE OF RS.7,06,954/- OFFERED BY THE ASSESS EE. ITA NO.1748/M/2013 SHRI NATHALAL R. CHAMRIA 5 6. IN VIEW OF OUR ABOVE OBSERVATIONS, THE APPEAL OF THE ASSESSEE IS HEREBY ALLOWED AND ACCORDINGLY, THE DISALLOWANCE U/S 14A I S RESTRICTED TO RS.7,06,954/- WHICH HAS BEEN SUO- MOTO OFFERED BY T HE ASSESSEE. ORDER PRONOUNCED IN THE OPEN COURT ON 30.06.2015. SD/- SD/- (G.S. PANNU) (SANJAY GARG) ACCOUNTANT MEMBER JUDICIAL MEMBER MUMBAI, DATED: 30.06.2015. * KISHORE, SR. P.S. COPY TO: THE APPELLANT THE RESPONDENT THE CIT, CONCERNED, MUMBAI THE CIT (A) CONCERNED, MUMBAI THE DR CONCERNED BENCH //TRUE COPY// [ BY ORD ER DY/ASSTT. REGISTRAR, ITAT, MUMBAI.