DIWAKAR VITTHAL SHETTY, MUMBAI V. ACIT 21(2), MUMBAI

ITA 3107/MUM/2017

• Counselvise Citation: [2019] 117 COUNSELVISE.COM (IT) 3356 (ITAT-MUMBAI)
• Duration Of Justice: 1 year(s) 11 month(s) 25 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 23-04-2019
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: D
• Assessment Year: 2011-2012
• Appeal Filed On: 28-04-2017
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: D G
• Assessee Lawyers: DR K SHIVARAM; NEELAM C JADHAV
• Keywords: Business income; Opportunity of being heard; Earning of tax free income; Rule 8D
• Section: 14A

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL D BENCH, MUM BAI BEFORE SHRI SHAMIM YAHYA, AM AND SHRI AMARJIT SINGH , JM ITA NO.3107/MUM/2017 (ASSESSMENT YEAR: 2011-12) DIWAKAR VITTHAL SHETTY A-4/605, 6 TH FOOR, MHADA PRATIKSHA NAGAR, SION KOLIWADA, MUMBAI-400 022 VS. ACIT-21(2) MUMBAI PAN/GIR NO. AOBPS 0234 B ( APPELLANT ) : ( RESPONDENT ) APPELLANT BY : DR. K. SHIVARAM & MS. NEELAM C. JADHAV RESPONDENT BY : SHRI D. G. PANSARI DATE OF HEARING : 07.02.2019 DATE OF PRONOUNCEMENT : 23.04.2019 O R D E R PER SHAMIM YAHYA, A. M.: THIS APPEAL BY THE ASSESSEE IS DIRECTED AGAINST THE ORDER OF THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS)-38, MUMBAI (LD .CIT(A) FOR SHORT) DATED 30.01.2017 AND PERTAINS TO THE ASSESSMENT YEAR (A.Y .) 2011-12. 2. THE GROUNDS OF APPEAL READ AS UNDER: I. DISALLOWANCE OF PROPORTIONATE INTERES T PAID AND CAR EXPENDITURE U/S.14A OFINCOME TAX ACT, READ WITH RULE 8D AMOUNTING TO RS .20,40,331/-IS BAD IN LAW. ; 1. THE LEARNED CIT(A) FAILED TO APPRECIATE THAT, AGAINST THE INTEREST PAID OF RS.43,75,573/- ON BORROWED MONEY ASSESSEE HAS EARNE D TAXABLE INTEREST OF RS.63,75,573/- HENCE AS THE BORROWED MONEY WAS NOT INVESTED FOR EA RNING EXEMPT INCOME NO DISALLOWANCE CAN BE MADE U/S 14A OF THE I NCOME TAX -ACT., HENCE ADDITION ,R: OF RS 20,40,331/- CONFIRMED BY THE CIT(A) MAY BE DE LETED. 2. THE LEARNED CIT(A) FAILED TO APPRECIATE THAT T HE CAR EXPENSES OF AMOUNTING TO RS.81,833/- CANNOT BE APPORTIONED FOR EXPENSES RELA TING TO EXEMPT INCOME, HENCE ADDITION CONFIRMED BY THE CIT(A) MAY BE DELETED. 3 . WITHOUT PREJUDICE TO ABOVE, NO EXPENDITURE WAS INCU RRED BY THE ASSESSEE FOR EARNING SHARE OF PROFIT FROM THE FIRM AND NO DISALLOWANCE C AN BE MADE U/S 14A IN RESPECT OF SHARE OF PROFIT FROM THE FIRM. 2 ITA NO.3107/MUM/2017 3. BRIEF FACTS OF THE CASE ARE AS UNDER: DURING THE COURSE OF ASSESSMENT PROCEEDINGS, THE AS SESSING OFFICER (A.O. FOR SHORT) OBSERVED THAT THE ASSESSEE HAS EARNED EXEMPT SHARE PROFIT INCOME OF RS.61,26,266/- FROM FIRMS WHICH INCLUDES RS.23,607/- FROM M.R. SHE LTER, RS.50,24,841 /- FROM NEETA DEVELOPERS AND RS.78,818/- FROM UNIVERSAL HOUSING C ORPORATION BESIDES TAXABLE INCOME OF RS.71,73,799/-. AGAINST THE AFORESAID INCOME, TH E ASSESSEE CLAIMED DEDUCTION OF RS.43,47,707/- ON ACCOUNT OF INTEREST PAYMENTS. 4. DURING THE COURSE OF ASSESSMENT PROCEEDINGS, THE A. O. ASKED THE ASSESSEE TO JUSTIFY ITS CLAIM OF DEDUCTION OF THE AFORESAID INT EREST PAYMENT, IN RESPONSE TO WHICH THE ASSESSEE SUBMITTED THAT LOANS TAKEN WERE INVESTED F OR BUSINESS PURPOSE TO EARN INCOME AND THE INTEREST PAID ON SUCH LOAN BE ALLOWED AS EX PENDITURE INCURRED FOR EARNING THE BUSINESS INCOME. 5. REGARDING THE ALLOWABILITY OF INTEREST PAYMENT A GAINST EXEMPT SHARE INCOME FROM FIRMS, THE LD. COUNSEL OF THE ASSESSEE SUBMITTED TH AT THE SHARE OF PROFIT IS EXEMPT IN THE HANDS OF THE PARTNERS AS TOTAL PROFIT IS TAXED IN T HE HANDS OF THE FIRM AND THEREFORE IT IS NOT TAXED AGAIN IN THE HANDS OF THE PARTNER. 6. THE A.O. CONSIDERED THE SUBMISSIONS OF THE ASSES SEE AND HELD THAT THE ASSESSEE HAS CLAIMED DEDUCTION ON ACCOUNT OF INTERESTS PAID ON L OANS TAKEN FROM THE INTEREST AND REMUNERATION RECEIVED FROM PARTNERSHIP FIRMS CLAIMI NG THAT THE LOANS WERE INVESTED IN PARTNERSHIP FIRMS, IN WHICH HE IS A PARTNER AND HAD SIMULTANEOUSLY EARNED EXEMPT SHARE INCOME OF RS.61,26,266/- FRORN THE SAME PARTNERSHIP FIRMS. THE CONTENTION OF THE ASSESSEE IS THAT NO INTEREST SHOULD BE DISALLOWED IN RESPECT OF EXEMPT INCOME AS THE SHARE PROFIT IS 3 ITA NO.3107/MUM/2017 NOT EXEMPT AS TAX HAS BEEN PAID ON PROFITS BY THE F IRMS AND SHARE INCOME IS THE SHARE OF PROFIT AFTER PAYMENT OF TAX. AS REGARDS THE QUESTIO N AS TO WHETHER ANY DISALLOWANCE IS REQUIRED TO BE MADE U/S.14 A IN RESPECT OF EXEMPT S HARE PROFIT EARNED BY THE ASSESSEE, THE AO REFERRED TO THE DECISION OF AHMEDABAD SPECIAL BE NCH OF ITAT IN THE CASE OF SHRI VISHNU ANANT MAHAJAN VS. ASSTT. COMMISSION OF INCOM E TAX (ITA NO. 3002/AHD/2009) WHEREIN IT WAS HELD THAT 'THE FIRM IS TRANSLUCENT V EHICLE UNDER THE ACT AND A FIRM AND ITS PARTNERS ARE ASSESSABLE SEPARATELY ON THEIR TOTAL I NCOME IN THEIR NAMES, NOTWITHSTANDING THE POSITION IN PARTNERSHIP ACT THAT THE FIRM IS A COMPENDIUM OR A COLLECTIVE NAME OF THE PARTNERS'. 7. FURTHER, THE A.O. REFERRED TO THE PROVISIONS OF THE SECTION 10(2A) AND STATED THAT THE FIRM AND PARTNERS ARE SEPARATELY ASSESSABLE ENT ITIES; IT WOULD BE DIFFICULT TO HOLD THAT THE SHARE OF INCOME IS NOT EXCLUDED FROM THE TOTAL INCOME OF THE PARTNERS. THEREAFTER, THE A.O. REFERRED TO THE PROVISO OF SECTION 14A STATING THAT FOR SUCH KIND OF SITUATIONS SECTION 14A WILL COME INTO OPERATION AND ANY EXPENDITURE IN CURRED IN EARNING THE SHARE FROM PARTNERSHIP FIRM WILL HAVE TO BE DISALLOWED. IN VIE W OF THE ABOVE FACTS AND JUDICIAL PRONOUNCEMENT, THE A.O. MADE PROPORTIONATE DISALLOW ANCE OF INTEREST AND CAR EXPENSES AMOUNTING TO RS.20,40,331 /-AND ADDED BACK TO THE T OTAL INCOME OF THE ASSESSEE. IN VIEW OF THE ABOVE AFORESAID ADDITIONS OF RS.20, 40,331/-, THE ASSESSEE HAS FILED THE PRESENT APPEAL. 8. AGAINST THE ABOVE ORDER, THE ASSESSEE IS IN APPE AL BEFORE THE LD. CIT(A). 9. THE LD. CIT(A) NOTED THE SUBMISSION OF THE ASSESSE E AS UNDER: 3.1 DURING THE COURSE OF APPELLATE PROCEEDINGS, THE APPELLANT SUBMITTED THAT HE HAS EARNED INCOME OF RS.1,33,00,065/- DRAWN FROM DIFFER ENT FIRMS, WHEREIN HE IS A PARTNER 4 ITA NO.3107/MUM/2017 AND OUT OF THE AFORESAID INCOME, RS.61,26,266/-WAS THE SHARE OF PROFIT EARNED BY HIM. U WAS FURTHER CONTENDED THAT THE SHARE INCOME EARNED FROM THE FIRMS; IS TAXED IN THE HANDS OF THE FIRMS BUT EXEMPT IN THE HANDS OF THE PARTNER S. 3.2 THE APPELLANT SUBMITTED THAT THE WHOLE PURPOSE OF I NSERTION OF SECTION 14A WAS TO DISALLOW EXPENDITURE THAT HAD BEEN INCURRED IN RELA TION TO EARNING OF INCOME WHICH DID NOT FORM PART OF TOTAL INCOME UNDER THE ACT. EMPHAS IS OF THE SECTION IS TO DISALLOW EXPENDITURE INCURRED ON EARNING EXEMPT INCOME. IN T HE APPELLANT'S CASE, THE SHARE OF PROFIT WHICH IS RECEIVED BY HIM IS NOT TAXABLE IN H IS HANDS AS IT WAS ALREADY SUBJECTED TO TAX IN THE HANDS OF FIRM. THE APPELLANT CONTENDED T HAT THEREFORE, TO AVOID TAXING THE SAME INCOME TWICE, THE SHARE OF PROFIT RECEIVED BY THE P ARTNERS IS EXEMPTED FROM TAX AND IS ACCORDINGLY NOT HIT BY THE PROVISION OF SECTIONS 14 A SO AS TO MAKE ANY DISALLOWANCE. 3.3 FURTHER IT WAS CONTENDED THAT THE ASSESSEE HAS OBTAINED LOANS ON INTEREST FROM VARIOUS PARTIES, WHICH WERE INVESTED IN VARIOUS BUS INESS VENTURES INCLUDING THE FIRMS AND THAT ON THESE LOANS, HE HAS EARNED AT TOTAL INTERES T INCOME OF RS.63,75,573/- AND PAID INTEREST ON THESE BORROWED LOANS AMOUNTING TO RS,43 ,47,707/-. IT WAS FURTHER SUBMITTED THAT THE ENTIRE BORROWINGS HAVE NOT BEEN UTILISED T OWARDS PARTNERSHIP FIRMS AND THEREFORE INTEREST ON SUCH BORROWINGS CANNOT BE SUBJECT MATTE R OF DISALLOWANCE UNDER SECTION 14A. 3.4 IT WAS CONTENDED THAT THE INTEREST EARNED FROM PARTNERSHIP FIRMS HAVE DIRECT NEXUS IN INTEREST PAID ON BORROWINGS MADE AND DISBURSED T O PARTNERSHIP FIRM AND THEREFORE NO INTEREST CAN BE DISALLOWED UNDER SECTION 14A. 3.5 AS REGARDS THE DISALLOWANCE MADE BY THE AO UND ER SECTION 14A IN RESPECT OF CAR EXPENSES OF RS.81,833/-, THE APPELLANT, SUBMITTED T HAT THE MOTOR CAR WAS USED FOR TIN- PURPOSE OF BUSINESS OF THE FIRM AND HAS NO RELATION TO THE SHARE OF PROFIT FROM PARTNERSHIP FIRM, HENCE CANNOT BE CONSIDERED FOR DISALLOWANCE U /S. 1 4A OF THE ACT. 10. HOWEVER, THE LD. CIT(A) WAS NOT CONVINCED. HE P ROCEEDED TO PLACE RELIANCE UPON THE DECISION OF AHMEDABAD SPECIAL BENCH IN THE CASE OF SHRI VISHNU ANANT MAHAJAN VS. ASST. CIT (IN ITA NO. 3002/AHD/2009) AND CONCLUDED AS UNDER: 4.8 IN VIEW OF THE DECISION RENDERED BY AHMEDABAD S PECIAL BENCH, THE PARTNERS SHARE OF PROFITS WILL BE CONSIDERED AS AN INCOME WHICH DO ES NOT FORM PART OF TOTAL INCOME FOR THE PURPOSE OF SECTION 14A. THUS, IN VIEW OF THE AB OVE FACTS AND JUDICIAL PRONOUNCEMENTS, I AM OF THE VIEW THAT THE PROVISION CONTAINED IN SECTION 14A ARE APPLICABLE TO THE FACTS OF THE CASE AND THE DISALLO WANCE MADE BY THE A.O. AMOUNTING TO RS.20,40,331/- IS UPHELD. 11. AGAINST THE ABOVE ORDER, THE ASSESSEE IS IN APP EAL BEFORE US. 12. WE HAVE HEARD BOTH THE COUNSEL AND PERUSED THE RECORDS. THE LD. COUNSEL OF THE ASSESSEE SUBMITTED THAT THE AUTHORITIES BELOW HAVE NOT UNDERSTOOD THE FACTS OF THE CASE. THAT THEY HAVE NOT APPRECIATED THE SUBMISSIONS IN TH E FACTUAL DETAILS SUBMITTED BY THE ASSESSEE. HE SUBMITTED THAT THE AUTHORITIES BELOW H AVE ONLY CONSIDERED THE 5 ITA NO.3107/MUM/2017 AHMEDABAD SPECIAL BENCH IN THE CASE OF SHRI VISHNU ANANT MAHAJAN (SUPRA) AS ABOVE AND DISALLOWED THE CLAIM OF THE ASSESSEE. THE LD. C OUNSEL OF THE ASSESSEE PLEADED THAT THE SAID DECISION IS NOT AT ALL APPLICABLE ON THE F ACTS OF THIS CASE. HE REFERRED TO THE PAPER BOOK SUBMITTED IN THIS REGARD. HE SUBMITTED T HAT ASSESSEE HAS PAID INTEREST OF RS.43,75,573/- ON BORROWED MONEY BUT HAS EARNED TAX ABLE INTEREST OF RS.63,75,573/- AS INTEREST ON CURRENT CAPITAL IN PARTNERSHIP. HE F URTHER CLAIMED THAT NO BORROWED MONEY WAS UTILIZED IN EARNING EXEMPT INCOME. HE SUB MITTED THAT THE A.O. HAS NOT EXAMINED THE FACTUAL DETAILS. HE PLEADED THAT THE I SSUE MAY BE REMITTED TO THE FILE OF THE A.O. TO EXAMINE THE FACTUAL DETAILS. HE ALSO RE FERRED TO THE DECISION OF THE ITAT, MUMBAI BENCH IN THE CASE OF ACIT VS. SHRI ARUNBHAI CHIMANLAL SHAH (IN ITA NO. 5999/MUM/2013 VIDE ORDER DATED 01.05.2015). HE PLEA DED THAT THE SAID DECISION SUPPORTS THE CASE OF THE ASSESSEE. 13. PER CONTRA, THE LD. DEPARTMENTAL REPRESENTATIVE (LD. DR FOR SHORT) SUBMITTED THAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE, TH E MATTER MAY BE REMITTED TO THE FILE OF THE A.O. TO EXAMINE THE FACTUAL DETAILS. 14. UPON CAREFUL CONSIDERATION, WE FIND THAT IN THI S CASE, ASSESSEE HAS EARNED INCOME FROM PARTNERSHIP FIRM WHICH IS EXEMPT FROM T AX. ASSESSING OFFICER HAS NOTED THAT ASSESSEE HAS INCURRED EXPENDITURE IN CONNECTIO N WITH EARNING OF THIS EXEMPT INCOME AND HENCE HE HAS MADE THE DISALLOWANCE. IN T HIS REGARD, AUTHORITIES BELOW HAVE ALSO PLACED RELIANCE UPON THE BY THE SPECIAL B ENCH DECISION REFERRED ABOVE. 15. PER CONTRA, LEARNED COUNSEL OF THE ASSESSEE, PL EADED THAT AUTHORITIES BELOW HAVE NOT PROPERLY UNDERSTOOD THE FACTS OF THE CASE. HE S UBMITTED THAT ASSESSEE HAS MUCH 6 ITA NO.3107/MUM/2017 MORE INTEREST INCOME EARNED ON ITS CAPITAL ACCOUNT WHICH IS SUBJECT TO TAX THAN THE INTEREST PAID. HE FURTHER SUBMITTED THAT CONSIDERAB LE LESS AMOUNT OF BORROWED FUNDS WERE USED FOR INVESTMENT IN PARTNERSHIP FIRMS. FURT HER, ASSESSEES COUNSEL PLEADED THAT THERE ARE DECISION FROM ITAT MUMBAI IN FAVOUR OF ASS ESSEE. IN THESE CIRCUMSTANCES BOTH THE COUNSELS HAVE FAIRLY AGREED THAT THE MATTE R MAY BE REMITTED TO THE FILE OF ASSESSING OFFICER TO FACTUALLY EXAMINE THE SUBMISSI ONS BY THE ASSESSEE. ACCORDINGLY, IN THE INTEREST OF JUSTICE, WE REMIT THE ISSUE THE FILE OF THE ASSESSING OFFICER. ASSESSING OFFICER IS DIRECTED TO FACTUALLY EXAMINE THE CASE I N VIEW OF THE SUBMISSIONS MADE BY THE LEARNED COUNSEL OF THE ASSESSEE. NEEDLESS TO AD D THE ASSESSEE SHOULD BE GRANTED ADEQUATE OPPORTUNITY OF BEING HEARD. 16. IN THE RESULT, THIS APPEAL BY THE ASSESSEE IS A LLOWED FOR STATISTICAL PURPOSES. O DER PRONOUNCED IN THE OPEN COURT ON 23 /04/2019 SD/- SD/- (AMARJIT SINGH) (SHAMIM YAHYA) JUDICIAL MEMBER ACCOUNTANT MEMBER MUMBAI; DATED : 23/04/2019 ROSHANI , SR. PS/SHEKHAR, PS COPY OF THE ORDER FORWARDED TO : 1. THE APPELLANT 2. THE RESPONDENT 3. THE CIT(A) 4. CIT - CONCERNED 5. DR, ITAT, MUMBAI 6. GUARD FILE BY ORDER, (DY./ASSTT. REGISTRAR) ITAT, MUMBAI