Appeal Details
Counselvise Citation
[2022] 106 COUNSELVISE.COM (IT) 5356 (ITAT-RAJKOT)
Assessee PAN
Bench
Appeal Number
CRN Number
Duration Of Justice
4 year(s) 11 month(s) 2 day(s)
Appellant
Respondent
Appeal Type
Income Tax Appeal
Pronouncement Date
19-07-2022
Appeal Filed By
Assessee
Order Result
PartlyAllowed
Bench Allotted
DB
Assessment Year
2013-2014
Appeal Filed On
16-08-2017
Judgement Text
Page 1 of 9 आयकर अपीलीय अिधकरण, अहमदाबाद ᭠यायपीठ IN THE INCOME TAX APPELLATE TRIBUNAL, RAJKOT BENCH, RAJKOT (CONDUCTED THROUGH E-COURT AT AHMEDABAD) BEFORE SHRI MAHAVIR PRASAD, JUDICIAL MEMBER AND SHRI WASEEM AHMED, ACCOUNTANT MEMBER अपील सं./ITA Nos.201-202/Rjt/2017 िनधाᭅरण वषᭅ/Asstt. Years: (2012-2013 & 2013-14) Radhika Trade Link, Shop No.217, Rajshrungi, Palace Road, Rajkot. PAN: AAIFR3932N Vs. Asst. Commissioner of Income Tax, Circle-2(1), Rajkot. (Applicant) (Respondent) Assessee by : Shri R.K. Doshi, A.R Revenue by : Shri B.D. Gupta, Sr. D.R सुनवाई कᳱ तारीख/Date of Hearing : 02/06/2022 घोषणा कᳱ तारीख /Date of Pronouncement: 20/07/2022 आदेश/O R D E R PER WASEEM AHMED, ACCOUNTANT MEMBER: The captioned two appeals have been filed at the instance of the Assessee against the separate orders of the Learned Commissioner of Income Tax(Appeals)- 2, Rajkot, of even dated 23/03/2017 arising in the matter of assessment order passed under s. 143(3) of the Income Tax Act, 1961 (here-in-after referred to as "the Act") relevant to the Assessment Years 2012-13 & 2013-14. ITA no.201-202/Rjt/2017 Asstt. Years 2012-13 & 2013-14 Page 2 of 9 First we take up ITA NO. 201/Rjt/2017, an appeal by the assessee for AY 2012-13 2. The assessee has raised the following grounds of appeal: 1. The order of the learned CIT(A) is bad in law and contrary to the facts of the case. 2. The leanred CIT(A) has erred in confirming the action of the AO disallowing expenses of Rs.38,06,300/- u/s.14A r.w. rule 8D of the IT rules. 3. The order of the learned CIT(A) is illegal, unjustified and against the principles of natural justice. 4. Without prejudice to the above you petitioner craves leave to add, amend, alter, vary or withdraw all or any of the grounds on or before the hearing of appeal. 3. The only issue raised by the assessee is that the learned CIT(A) erred in confirming the addition of Rs. 38,06,300/- made under section 14A read with rule 8D of Income Tax Rule. 4. The assessee is a partnership firm and engaged in the business of trading of Gold and Silver and Shares. During the year under consideration, the assessee firm has earned dividend income of Rs. 29,05,861/- which was claimed as exempted income under section 10(34/35) of the Act. However, the assessee has not made any disallowance of corresponding expenses under the provision of 14A of the Act. On question, the assessee submitted that the investments were made in earlier year out the fund available in the form of partner’s capital and no expense was incurred to earn such dividend income. Therefore, no disallowance under section 14A of the Act is required to be made. 5. The AO being dissatisfied with the submission of the assessee held that the assessee itself admitted that the investment in shares and mutual fund were made out of partner’s capital on which it is paying interest @ 6% to the partners. Thus, the interest @ 6% on the value of investment is directly related to exempted ITA no.201-202/Rjt/2017 Asstt. Years 2012-13 & 2013-14 Page 3 of 9 income. Accordingly the AO worked out the interest of Rs. 36,44,303/- and disallowed the same being expenses directly incurred for earning exempted income under clause (a) of sub-rule (2) of Rule 8D of Income Tax Rule. Similarly, the AO worked out the administrative expenses of Rs. 1,61,996/- being 0.5% of average investment under clause (iii) of sub-rule (2) of Rule 8D of Income Tax Rule. Thus, the AO made disallowances of Rs. 38,06,300/- in aggregate which was added to the total income of the assessee. 6. On appeal, the learned CIT (A) confirmed the order of the AO. 7. Being aggrieved by the order of the learned CIT (A) the assessee is in appeal before us. 8. The learned AR for the assessee before us filed synopsis, paper book running from pages 1 to 30 and 1 to 96 along with written submission which are kept on record. The learned AR before us inter alia contended that disallowances under section 14A read with rule 8D of income tax rule cannot exceeds the exempted income. It was furnished that appellant assessee has earned dividend income of Rs. 29,05,561/- only whereas disallowances made by the AO and confirmed by the learned CIT(A) is of Rs. 38,06,300/- which is in excess and unjustified. 8.1 The learned AR further contended that the AO while working out the disallowances of administrative expense being 0.5% of average value of investment considered the entire investment made by it whereas as per the provision of law and judicial precedence laid down by various court of law only those investment which yielded exempted income during the year should only be considered. 8.2 Likewise, the learned AR further contended that interest paid to the partner should not be considered while working out the disallowance to be made under the provisions of section 14A read with rule 8D of Income Tax Rule. ITA no.201-202/Rjt/2017 Asstt. Years 2012-13 & 2013-14 Page 4 of 9 9. On the other hand learned DR vehemently supported the order of the authorities below. 10. We have heard the rival contentions of the both parties and perused the materials available on record before us. The facts of the case have been elaborated in previous paragraph, hence for the sake of brevity, we are not inclined to repeat the same. At the outset we note that the AO has made the disallowance of Rs. 38,06,300/- under section 14A read with rule 8D of Income Tax Rule against exempted income of Rs. 29,05,561/- only. The learned AR before us made argument on three folds. First fold of argument is that the disallowances under section 14A cannot exceed the amount of exempted income. The second fold of argument is that while computing the disallowances of expenses under clause (iii) of the Rule 8D(2) being 0.5% of the average value of investment only those investment yielding exempted income should only be considered. Third fold of argument is that the interest paid on partner’s capital is not expenses for the purpose of section 14A, indeed, the same is attribution of profit. 10.1 We proceed to adjudicate the third fold of argument first. At the outset we find that this issue has been dealt by ITAT Pune Bench in case of Qualities Industries Vs. JCIT reported in 161 ITD 2017,where the coordinate bench has decided the issue in favour of the assessee by observing as under: 10. We have carefully considered the rival submissions. The pre-dominant question that arises for our consideration is whether payment of interest to the partners by the partnership firm toward use of partner's capital is in the nature of 'expenditure' or not for the purposes of section 14A of the Act and consequently, whether interest on partners capital is amenable to section 14A or not in the hands of partnership firm. 11. In order to adjudicate this legal issue, we need 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 charged on partners capital was not allowed in the hands of partnership firm while it was simultaneously taxable in the hands of respective partners. An amendment was inter alia brought in by the Finance Act 1992 in section 40(b) to enable the firm to claim deduction of interest outgo payable to partners on their respective capital subject to some upper limits. Hence, as per the present scheme of taxation, the interest payment on partners capital in essence is not treated as allowable business expenditure except for the deduction available under S. 40(b) of the Act. ITA no.201-202/Rjt/2017 Asstt. Years 2012-13 & 2013-14 Page 5 of 9 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 partners subject to the limits and conditions specified in section 40(b) of the Act. In turn, these items will be taxed in the hands of the partners as business income under s. 28(v). Share of partners in the income of the firm is exempt from tax under section 10(2A). Thus, the share of income from 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 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. In this context, we also 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 only under section 40(b) and the deduction of such interest to partners is out of the purview of s. 36 or 37 of the Act. Notably, there has been no amendment in the general law provided under Partnership Act 1932. The amendment to section 40(b) as referred hereinabove has only altered the mode of taxation. Needless to say, the Partnership firm is not a separate legal entity under the Partnership Act. It is not within the purview of 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 Supreme Court in the case of R.M. Chimbaram Pillai (supra) relied upon by the Assessee. Supreme Court has held in the case of R.M. Chidambaram Pillai, etc. (supra) held that: "A firm is not a legal person, even though it has some attributes of personality. In Income-tax law, a firm is a unit of assessment, by special provisions, but it is not a full person. Since 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 cent thereof, representing agricultural income and is liable to tax only to the extent of 40 per cent." Supreme Court has also held in the case of CIT v. Ramniklal Kothari [1969] 74 ITR 57 (SC) that the business of the firm is business of the partners of the firm and, hence, salary, interest and profits received by the partner from the firm is business income and, therefore, expenses incurred by the partners for the purpose of earning this income from the firm are admissible as deduction from such share income from the firm in which he is partner. 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 defines the terms partnership, partner, firm and firm name as under : "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 into partnership with one another are called individually 'Partners' and ITA no.201-202/Rjt/2017 Asstt. Years 2012-13 & 2013-14 Page 6 of 9 collectively a 'firm' and the name under which their business is carried on is called the 'firm name." Thus, it is clear from the above that firm and partners of the firm are not separate person under Partnership Act although separate 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 section 36(1)(iii) is not applicable at all. Section 40(b) is the only section governing deduction towards interest to partners. In the light of what is already noted above that firm and partners not being two separate persons, the question of borrowing capital by the firm from its partners does not arise at all and, therefore, section 36(1)(iii) is not at all applicable for the purposes of computation of interest to partners under section 40(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 laid down under section 36 of the Act to find out whether the capital was borrowed 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 interest paid by the firm and claimed as deduction is simultaneously susceptible 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 have separate legal personalities under the basic law as discussed. The interest paid to partners and simultaneously getting subjected to tax in the hands of its partners is merely in the nature of contra items in the hands of the firms and partners. Consequently interest paid to its partners cannot be treated at par with the other interest payable to outside parties. Thus, in substance, the revenue is not adversely affected at all by the claim of interest on capital employed with the firm by the partnership firm and partners put together. Thus, capital diverted in the mutual funds to generate alleged tax free income does not lead to any loss in revenue by this action of the assessee. In view of the inherent mutuality, when the partnership firm and its partners are seen holistically and in a combined manner with costs towards interest eliminated in contra, the investment in mutual funds generating tax free income bears the characteristic of and attributable to its own capital where no disallowance under S. 14A read with Rule 8D is warranted. Consequently, the plea of the assessee is merited in so far as interest attributable to partners. 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. Similarly, in the absence of any specific plea from assessee towards disallowance under Rule 8D(3), we hold it sustainable in view of express mandate of law. The matter is accordingly remanded back to the file of the Assessing Officer for re- computation of disallowance under Rule 8D r.w.s. 14A of the Act in terms of our opinion expressed hereinabove. 10.2 Fact of the issue on hand viz a viz the issue in above order is identical. Before us revenue has not pointed any distinguishing feature in the fact of case or change in law. Therefore respectfully following the above order we hold that interest paid to partner on their capital cannot be considered for the purpose of the disallowance under the provision of section 14A of the Act ITA no.201-202/Rjt/2017 Asstt. Years 2012-13 & 2013-14 Page 7 of 9 10.3 Coming to second fold of argument i.e. while computing disallowances under rule 8D(2)(iii) r.w.s. 14A only those investment should be taken which is yielding exempted income in the year. At the outset we find that the ITAT, Special Bench of Delhi in the case of Asstt. CIT v. Vireet Investment (P.) Ltd. [2017] 82 taxmann.com 415/165 ITD 27 had considered an identical issue and held that while computing average value of investments only those investments which yield exempt income in the year should be considered. Therefore, we are of the considered view that for computing disallowance under Rule 8D(2)(iii), those investments which yield exempt income only needs to be considered. Therefore, we set aside the issue to the file of the AO and direct him to re-compute disallowance in light of our discussions herein above which comes at Rs. 50,075/- as per the assessee. 10.4 Coming to the first fold of argument i.e. addition cannot exceeds the amount of exempted income. We are in agreement with argument of learned AR for the assessee that the amount of disallowance under section 14A r.w.r. 8D cannot exceed the amount of exempted income. In this regard we find pertinent to refer the judgment of the Hon’ble Delhi High Court in case of P.CIT vs. Craft Builders & Construction (P.) Ltd. reported in (2019) 101 taxmann.com 167 and further SPL filed by the revenue against such order was dismissed by the Hon’ble Supreme Court in 112 taxmann.com 322 where the Hon’ble High court held as under: “25. Total exempt income earned by the respondent-assessee in this year was Rs. 19 lakhs. In these circumstances, we are not required to consider the case of the Revenue that the disallowance should be enhanced from Rs. 75.89 crores to Rs. 144.52 crores. Upper disallowance as held in Pr. CIT v. McDonalds India (P.) Ltd. ITA 725/2018 decided on 22nd October, 2018 cannot exceed the exempt income of that year. This decision follows the ratio and judgment of the Supreme Court in the case of Maxopp Investments Ltd. v. CI T[2018] 402 ITR 640/254 Taxman 325/91 taxmann.com 154 and the earlier judgments of the Delhi High Court in Cheminvest v. CIT [2015] 378 ITR 33/234 Taxman 761/61 taxmann.com 118 and CIT v. Holcim (P.) Ltd. [2015] 57 taxmann.com 28 (Delhi).” 10.5 In view of the above we direct the AO to limit the disallowance under section 14A read with rule 8D of Income Tax Rule, if any, then it should be lower of exempted income or the disallowance made under section 14A r.w.r. 8D of Rules of ITA no.201-202/Rjt/2017 Asstt. Years 2012-13 & 2013-14 Page 8 of 9 Income Tax Rules. Thus the grounds of appeal raised by the assessee is partly allowed. 10.6 In the result, the appeal of the assessee is partly allowed. Coming to ITA No. 202/Rjt/2017 an appeal by the assessee for the A.Y. 2013-14 11. The assessee has raised following grounds of appeal: 1. The order of the learned CIT(A) is bad in law and contrary to the facts of the case. 2. The leanred CIT(A) has erred in confirming the action of the AO disallowing expenses of Rs.48,49,645/- u/s.14A r.w.rule 8D of the IT rules. 3. The order of the learned CIT(A) is illegal, unjustified and against the principles of natural justice. 4. Without prejudice to the above you petitioner craves leave to add, amend, alter, vary or withdraw all or any of the grounds on or before the hearing of appeal. 12. The only issue raised by the assessee is that the learned CIT(A) erred in confirming the addition of Rs. 48,49,645/- made under section 14A read with rule 8D of Income Tax Rule. 13. At the outset we note that the issues raised by the assessee in its grounds of appeal for the AY 2013-14 are identical to the issues raised by it in ITA No. 201/Rjt/2017 for the assessment year 2012-13. Therefore, the findings given in ITA No. 201/Rjt/2017 shall also be applicable for the year under consideration i.e. AY 2013-14. The appeal of the assessee for the assessment 2012-13 has been decided by us vide paragraph Nos. 10 to 10.6 of this order partly in favour the assessee. The learned AR and the DR also agreed that whatever will be the findings for the assessment year 2012-13 shall also be applied for the year under consideration i.e. AY 2013-14. Hence, the ground of appeal filed by the assessee is hereby partly allowed. ITA no.201-202/Rjt/2017 Asstt. Years 2012-13 & 2013-14 Page 9 of 9 13.1 In the result appeal of the assessee is partly allowed. 14. In the combined result, both the appeals of the assessee are partly allowed. Order pronounced in the Court on 20/07/2022 at Ahmedabad. Sd/- Sd/- (MAHAVIR PRASAD) (WASEEM AHMED) JUDICIAL MEMBER ACCOUNTANT MEMBER (True Copy) Ahmedabad; Dated 20/07/2022 Manish
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