ASK PARTNERS, Ajmer V. ACIT, Ajmer

ITA 187/JPR/2017

• Counselvise Citation: [2018] 118 COUNSELVISE.COM (IT) 7973 (ITAT-JAIPUR)
• Duration Of Justice: 1 year(s) 9 month(s) 24 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 31-12-2018
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: A
• Next Hearing Date: 14-06-2017
• Assessment Year: 2013-2014
• Appeal Filed On: 06-03-2017
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: J C KULHARI
• Assessee Lawyers: SUBHASH PORWAL
• Keywords: Business income
• Section: 40(b); 14A; 37

Judgement Text

VK;DJ VIHYH; VF/KDJ.K] T;IQJ U;K;IHB] T;IQJ IN THE INCOME TAX APPELLATE TRIBUNAL, JAIPUR BENCHE S-A, JAIPUR JH FOT; IKY JKO] U;KF;D LNL; ,OA JH FOE FLAG ;KNO] YS[KK LNL; DS LE{K BEFORE: SHRI VIJAY PAL RAO, JM & SHRI VIKRAM SINGH YADAV, AM VK;DJ VIHY LA- @ ITA NO. 187/JP/2017 FU/KZKJ.K O'K Z @ ASSESSMENT YEAR :2013-14 M/S ASK PARTNERS, C/O SUNIL PORWAL & CO. RADHEY PREM, 19A, SOBHAG CLUB, CIVIL LINES, AJMER (RAJ.) CUKE VS. ACIT, CIRCLE-2, AJMER LFKK;H YS[KK LA-@THVKBZVKJ LA-@ PAN/GIR NO.: AAQFA7969J VIHYKFKHZ@ APPELLANT IZR;FKHZ@ RESPONDENT FU/KZKFJRH DH VKSJ L S@ ASSESSEE BY : SHRI SUBHASH PORWAL (CA) JKTLO DH VKSJ LS @ REVENUE BY : SHRI J. C. KULHARI (JCIT) LQUOKBZ DH RKJH[ K@ DATE OF HEARING : 10/12/2018 MN?KKS'K.KK DH RKJH[ K@ DATE OF PRONOUNCEMENT: 31/12/2018 VKNS'K@ ORDER PER: VIKRAM SINGH YADAV, A.M. THIS IS AN APPEAL FILED BY THE ASSESSEE AGAINST THE ORDER OF LD. CIT(A), AJMER DATED 30.01.2017 FOR A.Y. 2013-14 WHEREIN THE ASSESSEE FIRM HAS CHALLENGED THE SUSTENANCE OF DISALLOWANCE OF INTEREST PAID TO ITS PARTNERS. 2. BRIEFLY STATED, THE FACTS OF THE CASE ARE THAT T HE ASSESSEE IS A PARTNERSHIP FIRM ENGAGED IN BUSINESS OF TRADING OF SHARES, DERIVATIVES, FUTURES, CALL AND OPTIONS ON REGISTERED STOCK EXCHA NGES. DURING THE COURSE OF ASSESSMENT PROCEEDINGS, ON EXAMINATION OF ASSESS EES FINANCIAL ITA NO. 187/JP/2017 M/S ASK PARTNERS, AJMER VS. ACIT, AJMER 2 STATEMENT, THE ASSESSING OFFICER OBSERVED THAT THE ASSESSEE FIRM HAS MADE INVESTMENT IN MUTUAL FUNDS AND HAS EARNED DIVI DEND FROM SUCH MUTUAL FUNDS WHICH HAVE BEEN CLAIMED AS EXEMPT IN I TS RETURN OF INCOME. THE ASSESSING OFFICER HELD THAT THE PARTNERS HAVE M ADE INVESTMENT IN THE FIRMS CAPITAL AND THE SAID CAPITAL IS USED FOR MAK ING INVESTMENT IN THE MUTUAL FUNDS. THEREFORE, HE HELD THAT THE INTEREST PAYMENT ON PARTNERS CAPITAL IS NOT AN ALLOWABLE EXPENSES AGAINST THE DI VIDEND INCOME WHICH HAS BEEN CLAIMED AS EXEMPT AND THEREFORE, INVOKING PROVISIONS OF SECTION 14A READ WITH RULE 8D, HE WORKED OUT THE DISALLOWA NCE OF INTEREST AMOUNTING TO RS. 9,11,054/-. FURTHER, THE AO DISALL OWED AN AMOUNT OF RS. 52,069/- UNDER RULE 8D(III) OF THE ACT. ON APPEAL, THE DISALLOWANCE HAS BEEN CONFIRMED BY THE LD. CIT(A) AND NOW, THE ASSES SEE IS IN APPEAL AGAINST THE SAID DISALLOWANCE OF INTEREST PAID TO P ARTNERS. 3. DURING THE COURSE OF HEARING, THE LD. AR SUBMIT TED THAT THE ASSESSEE HAS NOT INCURRED ANY EXPENDITURE IN RELATION TO EXE MPT INCOME AND THE PROVISIONS OF SECTION 14A CAN ONLY BE APPLIED WHERE THE AO RECORDS THE FINDING THAT HE IS NOT SATISFIED ABOUT THE CORRECTN ESS OF CLAIM OF THE ASSESSEE IN RESPECT OF SUCH EXPENDITURE. IT WAS SUB MITTED THAT THERE IS SO SUCH FINDING RECORDED BY THE AO. IN SUPPORT, RELIAN CE WAS PLACED ON THE DECISION OF HONBLE DELHI HIGH COURT IN CASE OF MAX OPP INVESTMENT LTD. & ORS V. CIT [2011] 347 ITR 272. 4. IT WAS FURTHER SUBMITTED THAT THE PAYMENT OF INT EREST TO THE PARTNERS BY THE ASSESSEE FIRM AS PER THE PROVISIONS OF THE PARTNERSHIP DEED IS NOT AN EXPENDITURE WHICH IS SUBJECT TO THE PROVISIONS OF SECTION 14A AND IN SUPPORT, RELIANCE WAS PLACED ON THE DECI SION OF CO-ORDINATE ITA NO. 187/JP/2017 M/S ASK PARTNERS, AJMER VS. ACIT, AJMER 3 BENCH IN CASE OF QUALITY INDUSTRIES V. JCIT [2016] 73 TAXMANN.COM 363 WHEREIN IT WAS HELD AS UNDER:- 10. WE HAVE CAREFULLY CONSIDERED THE RIVAL SUBMIS SIONS. THE PRE- DOMINANT QUESTION THAT ARISES FOR OUR CONSIDERATION IS WHETHER PAYMENT OF INTEREST TO THE PARTNERS BY THE PARTNERSHIP FIRM TO WARD USE OF PARTNER'S CAPITAL IS IN THE NATURE OF 'EXPENDITURE' OR NOT FO R THE PURPOSES OF SECTION 14A OF THE ACT AND CONSEQUENTLY, WHETHER INTEREST O N PARTNERS CAPITAL IS AMENABLE TO SECTION 14A OR NOT IN THE HANDS OF PART NERSHIP FIRM. 11. IN ORDER TO ADJUDICATE THIS LEGAL ISSUE, WE NE ED TO APPRECIATE THE NUANCES OF THE SCHEME OF THE TAXATION. WE NOTE THAT PRIOR TO AMENDMENT OF TAXATION LAWS FROM AY 1993-94, THE INTEREST CHAR GED ON PARTNERS CAPITAL WAS NOT ALLOWED IN THE HANDS OF PARTNERSHIP FIRM WH ILE IT WAS SIMULTANEOUSLY TAXABLE IN THE HANDS OF RESPECTIVE P ARTNERS. AN AMENDMENT WAS INTER ALIA BROUGHT IN BY THE FINANCE ACT 1992 I N SECTION 40(B) TO ENABLE THE FIRM TO CLAIM DEDUCTION OF INTEREST OUTG O PAYABLE TO PARTNERS ON THEIR RESPECTIVE CAPITAL SUBJECT TO SOME UPPER LIMI TS. HENCE, AS PER THE PRESENT SCHEME OF TAXATION, THE INTEREST PAYMENT ON PARTNERS CAPITAL IN ESSENCE IS NOT TREATED AS ALLOWABLE BUSINESS EXPEND ITURE EXCEPT FOR THE DEDUCTION AVAILABLE UNDER S. 40(B) OF THE ACT. 11.1 OSTENSIBLY, WITH EFFECT FROM ASSESSMENT YEAR 1993- 94, PARTNERSHIP FIRMS COMPLYING WITH THE STATUTORY REQUIREMENTS AND ASSESSED AS SUCH ARE ALLOWED DEDUCTION IN RESPECT OF INTEREST TO PARTNER S SUBJECT TO THE LIMITS AND CONDITIONS SPECIFIED IN SECTION 40(B) OF THE AC T. IN TURN, THESE ITEMS WILL BE TAXED IN THE HANDS OF THE PARTNERS AS BUSIN ESS INCOME UNDER S. 28(V). SHARE OF PARTNERS IN THE INCOME OF THE FIRM IS EXEMPT FROM TAX ITA NO. 187/JP/2017 M/S ASK PARTNERS, AJMER VS. ACIT, AJMER 4 UNDER SECTION 10(2A). THUS, THE SHARE OF INCOME FRO M FIRM IS ON A DIFFERENT FOOTING THAN THE INTEREST INCOME WHICH IS TAXABLE UNDER THE BUSINESS INCOME. 11.2 SIMILARLY, WE NOTE THAT INTEREST AND SALARY RECEIV ED BY THE PARTNERS ARE TREATED ON A DIFFERENT FOOTING BY THE ACT AND N OT IN ITS ORDINARY SENSE OF TERM. THE SECTION 28(V) TREATS THE PASSIVE INCOM E ACCRUED BY WAY OF INTEREST AS ALSO SALARY RECEIVED BY A PARTNER OF TH E FIRM AS A 'BUSINESS RECEIPT' UNLIKE DIFFERENT TREATMENTS GIVEN TO SIMIL AR RECEIPTS IN THE HANDS OF ENTITIES OTHER THAN PARTNERS. IN THIS CONTEXT, WE A LSO NOTE THAT UNDER PROVISO TO SECTION 28(V), THE DISALLOWANCE OF SUCH INTEREST IS ONLY IN REFERENCE TO SECTION 40(B) AND NOT SECTION 36 OR S. 37. THIS ALSO GIVES A CLUE THAT DEDUCTION TOWARDS INTEREST IS REGULATED O NLY UNDER SECTION 40(B) AND THE DEDUCTION OF SUCH INTEREST TO PARTNERS IS O UT OF THE PURVIEW OF S. 36 OR 37 OF THE ACT. NOTABLY, THERE HAS BEEN NO AME NDMENT IN THE GENERAL LAW PROVIDED UNDER PARTNERSHIP ACT 1932. THE AMENDM ENT TO SECTION 40(B) AS REFERRED HEREINABOVE HAS ONLY ALTERED THE MODE OF TAXATION. NEEDLESS TO SAY, THE PARTNERSHIP FIRM IS NOT A SEPA RATE LEGAL ENTITY UNDER THE PARTNERSHIP ACT. IT IS NOT WITHIN THE PURVIEW O F THE INCOME-TAX ACT TO CHANGE OR ALTER THE BASIC LAW GOVERNING PARTNERSHIP . INTEREST OR SALARY PAID TO PARTNERS REMAINS DISTRIBUTION OF BUSINESS INCOME . 11.3 RELEVANT HERE TO REFER TO DECISION OF HON'BLE SUPR EME COURT IN THE CASE OF R.M. CHIMBARAM PILLAI (SUPRA) RELIED UPON B Y THE ASSESSEE. SUPREME COURT HAS HELD IN THE CASE OF R.M. CHIDAMBA RAM PILLAI, ETC. (SUPRA) HELD THAT: ITA NO. 187/JP/2017 M/S ASK PARTNERS, AJMER VS. ACIT, AJMER 5 'A FIRM IS NOT A LEGAL PERSON, EVEN THOUGH IT HAS S OME ATTRIBUTES OF PERSONALITY. IN INCOME-TAX LAW, A FIRM IS A UNIT OF ASSESSMENT, BY SPECIAL PROVISIONS, BUT IT IS NOT A FULL PERSON. SI NCE A CONTRACT OF EMPLOYMENT REQUIRES TWO DISTINCT PERSONS, VIZ., THE EMPLOYER AND THE EMPLOYEE, THERE CANNOT BE A CONTRACT OF SERVICE , IN STRICT LAW, BETWEEN A FIRM AND ONE OF ITS PARTNERS. PAYMENT OF SALARY TO A PARTNER REPRESENTS A SPECIAL SHARE OF THE PROFITS. SALARY PAID TO A PARTNER RETAINS THE SAME CHARACTER OF THE INCOME OF THE FIRM. HELD ACCORDINGLY, THE SALARY PAID TO A PARTNER BY A FIRM WHICH GROWS AND SELLS TEA, IS EXEMPT FROM TAX, UNDER RULE 24 OF THE INDIAN INCOME-TAX RULES, 1922, TO THE EXTENT OF 60 PER CEN T THEREOF, REPRESENTING AGRICULTURAL INCOME AND IS LIABLE TO T AX ONLY TO THE EXTENT OF 40 PER CENT.' SUPREME COURT HAS ALSO HELD IN THE CASE OF CIT V. R AMNIKLAL KOTHARI [1969] 74 ITR 57 (SC) THAT THE BUSINESS OF THE FIRM IS BUSINESS OF THE PARTNERS OF THE FIRM AND, HENCE, SA LARY, INTEREST AND PROFITS RECEIVED BY THE PARTNER FROM THE FIRM IS BU SINESS INCOME AND, THEREFORE, EXPENSES INCURRED BY THE PARTNERS FOR TH E PURPOSE OF EARNING THIS INCOME FROM THE FIRM ARE ADMISSIBLE AS DEDUCTION FROM SUCH SHARE INCOME FROM THE FIRM IN WHICH HE IS PART NER. THUS, THE 'PARTNERSHIP FIRM' AND PARTNERS HAVE BEEN COLLECTIVELY SEEN AND THE DISTINCTION BETWEEN THE TWO WAS BLURRED IN THE JUDICIAL PRECEDENTS EVEN FOR TAXATION PURPOSES. 11.4 SECTION 4 OF THE INDIAN PARTNERSHIP ACT 1932 DEFIN ES THE TERMS PARTNERSHIP, PARTNER, FIRM AND FIRM NAME AS UNDER : ITA NO. 187/JP/2017 M/S ASK PARTNERS, AJMER VS. ACIT, AJMER 6 'PARTNERSHIP' IS THE RELATION BETWEEN PERSONS, WHO HAVE AGREED TO SHARE THE PROFITS OF A BUSINESS, CARRIED ON BY ALL OR ANY OF THE PARTNERS ACTING FOR ALL. PERSONS WHO HAVE ENTERED I NTO PARTNERSHIP WITH ONE ANOTHER ARE CALLED INDIVIDUALLY 'PARTNERS' AND COLLECTIVELY A 'FIRM' AND THE NAME UNDER WHICH THEIR BUSINESS IS C ARRIED ON IS CALLED THE 'FIRM NAME.' THUS, IT IS CLEAR FROM THE ABOVE THAT FIRM AND PART NERS OF THE FIRM ARE NOT SEPARATE PERSON UNDER PARTNERSHIP ACT ALTHOUGH SEPA RATE UNIT OF ASSESSMENT FOR TAX PURPOSES. THERE CANNOT THEREFORE BE A RELATIONSHIP INFERRED BETWEEN PARTNER AND FIRM AS THAT OF LENDER OF FUNDS (CAPITAL) AND BORROWAL OF CAPITAL FROM THE PARTNERS, HENCE SECTIO N 36(1)(III) IS NOT APPLICABLE AT ALL. SECTION 40(B) IS THE ONLY SECTIO N GOVERNING DEDUCTION TOWARDS INTEREST TO PARTNERS. IN THE LIGHT OF WHAT IS ALREADY NOTED ABOVE THAT FIRM AND PARTNERS NOT BEING TWO SEPARATE PERSO NS, THE QUESTION OF BORROWING CAPITAL BY THE FIRM FROM ITS PARTNERS DOE S NOT ARISE AT ALL AND, THEREFORE, SECTION 36(1)(III) IS NOT AT ALL APPLICA BLE FOR THE PURPOSES OF COMPUTATION OF INTEREST TO PARTNERS UNDER SECTION 4 0(B) OF THE ACT. TO PUT IT DIFFERENTLY, IN VIEW OF SECTION 40(B) OF THE ACT , THE ASSESSING OFFICER PURPORTEDLY HAS NO JURISDICTION TO APPLY THE TEST L AID DOWN UNDER SECTION 36 OF THE ACT TO FIND OUT WHETHER THE CAPITAL WAS B ORROWED FOR THE PURPOSES OF BUSINESS OR NOT. THUS, THE QUESTION OF ALLOWABILITY OR OTHERWISE OF DEDUCTION DOES NOT ARISE EXCEPT FOR S. 40(B) OF THE ACT. 11.5 AS NOTED, AS PER THE SCHEME OF THE ACT, THE I NTEREST PAID BY THE FIRM AND CLAIMED AS DEDUCTION IS SIMULTANEOUSLY SUS CEPTIBLE TO TAX IN THE HANDS OF ITS RESPECTIVE PARTNERS IN THE SAME MANNER . IN THE SAME VAIN, THE FIRM IS MERELY A COMPENDIUM OF ITS PARTNERS AND ITS PARTNERS DO NOT ITA NO. 187/JP/2017 M/S ASK PARTNERS, AJMER VS. ACIT, AJMER 7 HAVE SEPARATE LEGAL PERSONALITIES UNDER THE BASIC L AW AS DISCUSSED. THE INTEREST PAID TO PARTNERS AND SIMULTANEOUSLY GETTIN G SUBJECTED TO TAX IN THE HANDS OF ITS PARTNERS IS MERELY IN THE NATURE OF CO NTRA ITEMS IN THE HANDS OF THE FIRMS AND PARTNERS. CONSEQUENTLY INTEREST PA ID TO ITS PARTNERS CANNOT BE TREATED AT PAR WITH THE OTHER INTEREST PA YABLE TO OUTSIDE PARTIES. THUS, IN SUBSTANCE, THE REVENUE IS NOT ADVERSELY AF FECTED AT ALL BY THE CLAIM OF INTEREST ON CAPITAL EMPLOYED WITH THE FIRM BY THE PARTNERSHIP FIRM AND PARTNERS PUT TOGETHER. THUS, CAPITAL DIVERTED I N THE MUTUAL FUNDS TO GENERATE ALLEGED TAX FREE INCOME DOES NOT LEAD TO A NY LOSS IN REVENUE BY THIS ACTION OF THE ASSESSEE. IN VIEW OF THE INHEREN T MUTUALITY, WHEN THE PARTNERSHIP FIRM AND ITS PARTNERS ARE SEEN HOLISTIC ALLY AND IN A COMBINED MANNER WITH COSTS TOWARDS INTEREST ELIMINATED IN CO NTRA, THE INVESTMENT IN MUTUAL FUNDS GENERATING TAX FREE INCOME BEARS THE C HARACTERISTIC OF AND ATTRIBUTABLE TO ITS OWN CAPITAL WHERE NO DISALLOWAN CE UNDER S. 14A READ WITH RULE 8D IS WARRANTED. CONSEQUENTLY, THE PLEA O F THE ASSESSEE IS MERITED IN SO FAR AS INTEREST ATTRIBUTABLE TO PARTN ERS. HOWEVER, THE INTEREST PAYABLE TO PARTIES OTHER THAN PARTNERS, IN OUR VIEW , WOULD BE SUBJECTED TO PROVISIONS OF RULE 8D(2)(II) OF THE RULES. SIMILARL Y, IN THE ABSENCE OF ANY SPECIFIC PLEA FROM ASSESSEE TOWARDS DISALLOWANCE UN DER RULE 8D(3), WE HOLD IT SUSTAINABLE IN VIEW OF EXPRESS MANDATE OF L AW. THE MATTER IS ACCORDINGLY REMANDED BACK TO THE FILE OF THE ASSESS ING OFFICER FOR RE- COMPUTATION OF DISALLOWANCE UNDER RULE 8D R.W.S. 14 A OF THE ACT IN TERMS OF OUR OPINION EXPRESSED HEREINABOVE. 12. IN THE RESULT, APPEAL OF THE ASSESSEE IS PARTL Y ALLOWED. 5. THE LD. DR IS HEARD WHO HAS RELIED ON THE ORDER OF THE LOWER AUTHORITIES. ITA NO. 187/JP/2017 M/S ASK PARTNERS, AJMER VS. ACIT, AJMER 8 6. WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSED THE MATERIAL AVAILABLE ON RECORD. FOLLOWING THE DECISION OF THE COORDINATE BENCH IN CASE OF QUALITY INDUSTRIES (SUPRA), PAYMENT OF INTE REST TO THE PARTNERS TOWARDS THE USE OF THE PARTNERS CAPITAL AS PER THE PROVISIONS OF THE PARTNERSHIP DEED IS HELD NOT SUBJECT TO DISALLOWANC E UNDER SECTION 14A READ WITH RULE 8D(II) OF THE ACT. HOWEVER, IN RESP ECT OF DISALLOWANCE UNDER RULE 8D(III), NO SPECIFIC GROUND OR PLEA HAS BEEN TAKEN BY THE LD AR ON BEHALF OF THE ASSESSEE, HENCE THE SAME IS CONFIR MED. IN THE RESULT, APPEAL FILED BY THE ASSESSEE IS PART LY ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 31/12/2018. SD/- SD/- FOT; IKY JKO FOE FLAG ;KNO (VIJAY PAL RAO) (VIKRAM SINGH YADAV) U;KF;D LNL;@ JUDICIAL MEMBER YS[KK LNL;@ ACCOUNTANT MEMBER TK;IQJ@ JAIPUR FNUKAD@ DATED:- 31/12/2018. * GANESH KR. VKNS'K DH IZFRFYFI VXZSFKR@ COPY OF THE ORDER FORWARDED TO: 1. VIHYKFKHZ@ THE APPELLANT- M/S ASK PARTNERS, AJMER 2. IZR;FKHZ@ THE RESPONDENT- ACIT, CIRCLE-02, AJMER 3. VK;DJ VK;QDR@ CIT 4. VK;DJ VK;QDR@ CIT(A) 5. FOHKKXH; IZFRFUF/K] VK;DJ VIHYH; VF/KDJ.K] T;IQJ@ DR, ITAT, JAIPUR. 6. XKMZ QKBZY@ GUARD FILE {ITA NO. 187/JP/2017} VKNS'KKUQLKJ@ BY ORDER, LGK;D IATHDKJ@ ASST. REGISTRAR