Appeal details
Counselvise Citation
[2023] 140 COUNSELVISE.COM (IT) 108474 (ITAT-JAIPUR)
Assessee PAN
Bench
Appeal Number
Duration Of Justice
2 month(s) 28 day(s)
Appellant
Respondent
Appeal Type
Income Tax Appeal
Pronouncement Date
29-08-2023
Appeal Filed By
Assessee
Order Result
Allowed
Bench Allotted
B
Next Hearing Date
04-07-2023
Assessment Year
2018-2019
Appeal Filed On
01-06-2023
Judgement Text
1 ITA NO. 368/JP/2023 M/S. MANGLAM ARTS VS Pr.CIT, JAIPUR -2 vk;dj vihyh; vf/kdj.k] t;iqj U;k;ihB] t;iqj IN THE INCOME TAX APPELLATE TRIBUNAL, JAIPUR BENCHES, ‘’B” JAIPUR Jh laanhi xkslkbZ] U;kf;d lnL; ,oa Jh jkBksM deys'k t;UrHkkbZ] ys[kk lnL; ds le{k BEFORE: SHRI SANDEEP GOSAIN, JM & SHRI RATHOD KAMLESH JAYANTBHAI, AM vk;dj vihy la-@ITA No. 368/JP/2023 fu/kZkj.k o"kZ@Assessment Year : 2018-19 M/s. Manglam Arts Govind Nagar (East) Amber Palace Road, Jaipur cuke Vs. The Pr. CIT Jaipur-2 LFkk;h ys[kk la-@thvkbZvkj la-@PAN/GIR No.: AABFM 9591 K vihykFkhZ@Appellant izR;FkhZ@Respondent fu/kZkfjrh dh vksj ls@ Assessee by : Shri P.C. Parwal, CA jktLo dh vksj ls@ Revenue by: Shri Ajay Malik, CIT-DR lquokbZ dh rkjh[k@ Date of Hearing : 05/07/2023 mn?kks"k.kk dh rkjh[k@Date of Pronouncement: 30 /08/2023 vkns'k@ ORDER PER: SANDEEP GOSAIN, JM This appeal of the assessee is directed against the order of the ld. PCIT, Jaipur-2 dated 31-05-2023 for the assessment year 2018-19 in the matter of Section 154 r.w.s. 263 of the Act wherein the assessee has raised the following grounds of appeal. ‘’1. The order passed by the ld. PCIT u/s 154 r.w.s. 263 of the I.T. Act on an issue already discussed and declared in para 5.5 of order dated 29-03-2023 is illegal, bad in law and be 2 ITA NO. 368/JP/2023 M/S. MANGLAM ARTS VS Pr.CIT, JAIPUR -2 quashed as the same is beyond the scope of Section 154 of the Act. 2. The ld. PCIT has erred on facts and in law in holding that disallowance u/s 14 is required to be made in respect of interest of Rs.10,55,82,853/- paid/ credited on the partners capital account (Rs.10,41,43,027) & bank interest (Rs.14,39,826) without appreciating that interest on partners capital account being allocation of profit is a revenue neutral transaction and it is not an expenditure of interest paid on capital borrowed for the purpose of business.’’ 2.1 Apropos Ground 1 and 2 of the assessee, brief facts of the case are that the Ld. PCIT in its order u/s 263 dated 29.03.2023 discussed the issue of disallowance u/s 14A at Para 5.4. Thereafter at Para 5.5(ii) she computed the disallowance u/s 14A at Rs.96,38,869/- being 1% of the average value of investment in tax free bonds by giving a finding a Para 5.5(i) stating that explanation of assessee regarding claim of finance cost of Rs.10,85,82,853/- (correct amount Rs.10,55,82,853/-) in the P&L A/c is acceptable as this payment is a provision of interest on capital to partners and has no revenue impact because one side it is deductible expenses to the firm, on other side all the partners has included such income in their respective return of income and have paid due tax. Thereafter the Ld. PCIT issued notice u/s 154 dated 24.05.2023 stating that from the records it is seen that interest has actually been paid to the partners and is not a provision as recorded in order u/s 263. Thus interest on capital to partner is an expenditure to be 3 ITA NO. 368/JP/2023 M/S. MANGLAM ARTS VS Pr.CIT, JAIPUR -2 considered for the purpose of disallowance u/s 14A. The assessee furnished detailed reply dt. 31.05.2023 which is available Departmental paper book pages 16 to 26. The Ld. PCIT relying on the decision of Hon’ble Supreme Court in case of Munjal Sales Corporation Vs. CIT 298 ITR 298 observed that in this case it is held that interest on partners capital is primary to be considered as allowance u/s 36(1)(iii) and section 40(b) puts a restriction on the quantum of interest so allowable. Thus interest paid to partners is an expenditure allowable u/s 36(1)(iii) by restricting the deduction as per provisions of section 40(b)(iv) of the Act. Hence a mistake apparent from record has crept in which is rectified by directing the AO to verify the same and decide as per law. 2.2 During the course of hearing, the ld. AR of the assessee prayed to quash the order of the ld. PCIT with the submissions that an issue which is deliberated and discussed in the order and thereafter a view has been taken on that issue, again taking another view on the same issue is not a mistake apparent on record but is a change of opinion. In the present case, on the issue as to whether interest paid to partners on their capital is to be considered for disallowance u/s 14A has been deliberated by the PCIT at Para 5.5(i) of its order as under:- “Explanation of assessee regarding claim of finance cost of Rs.10,85,82,853/- (correct amount Rs.10,55,82,853/-) in the P&L A/c is acceptable as this payment is a provision of interest on capital to partners and has no revenue impact because one side it is deductible expenses to the firm, on other side all the partners has included such income in their respective return of income and have paid due tax.” 4 ITA NO. 368/JP/2023 M/S. MANGLAM ARTS VS Pr.CIT, JAIPUR -2 The ld. AR further submitted that thus when Ld. PCIT has taken a conscious view on the issue, the same cannot be said to be a mistake apparent on record. It is also noted that the ld. AR of the assessee relied on following case laws. 1. Quality Industries vs JCIT (2016) 161 ITD 217 (ITAT Pune) 2. ASK Partners vs ACIT (ITA No. 187/JP/2017 dated 31-12-2018) 3. T.S. Balaram ITO vs Volkart Brothers and Others [1971] 82 ITR 50 (SC) 4. CIT vs Hero Cycles (P) Ltd [1997] 228 ITR 463 (SC) 2.3 On the other hand, the ld. DR filed a paper book and supported the order of the ld. PCIT 2.4 We have heard both the parties and perused the materials available on record. It is noted that the ld. PCIT has passed order u/s 154 of the Act to rectify the mistake which according to her is apparent on record in so far as in the order passed u/s 263, she has not considered the finance cost for the purpose of disallowing u/s 14 A of the Act for which she placed reliance on the decision of Hon’ble Supreme Court in the case Munjal Sales Corporation Vs. CIT 298 ITR 298. We find that it is incorrect on the part of the ld. PCIT to state that finance cost has not been considered by her while discussing the disallowance u/s 14A of the Act. It is noted that this issue has been deliberated by the ld. PCIT at para 5.5 (i) of her order u/s 263 of the Act which for ready reference is reproduced as under:- 5 ITA NO. 368/JP/2023 M/S. MANGLAM ARTS VS Pr.CIT, JAIPUR -2 “Explanation of assessee regarding claim of finance cost of Rs.10,85,82,853/- (correct amount Rs.10,55,82,853/-) in the P&L A/c is acceptable as this payment is a provision of interest on capital to partners and has no revenue impact because one side it is deductible expenses to the firm, on other side all the partners has included such income in their respective return of income and have paid due tax.” Thus when the ld. PCIT has taken a conscious view on this issue then it cannot be said that any mistake apparent on record has crept in the order passed by her u/s 263 of the Act more particularly when there are number of decisions as mentioned hereinabove wherein it was held that interest paid on the capital account of the partners cannot be considered for disallowance u/s 14A of the Act. Therefore, in view of the decision of Hon’ble Supreme Court in the case of ITO vs Volkart Brothers and Others (1971) 82 ITR 60 wherein it is held that an error which has to be established by a long-drawn process of reasoning on points where there may conceivably be two opinions cannot be said to be an error apparent on the face of the record. A decision on debatable point of law is not a mistake apparent from the record. We also noted that decision of Hon’ble Supreme Court in the case of Munjal Sales Corporation vs CIT (supra) relied upon by the ld. PCIT is not applicable inasmuch as the assessment year involved in this decision are assessment year 1993-94 to 1997-98 whereas Section 14A was introduced in the Statute by Finance Act 2001. This decision was concerned with the scope of Section 40(b)(iv) of the Act where also the Hon’ble Supreme Court observed that conceptually partners capital is not loan or borrowing in the hands of Firm but for 6 ITA NO. 368/JP/2023 M/S. MANGLAM ARTS VS Pr.CIT, JAIPUR -2 the purpose of restricting the disallowance of interest paid on the partners capital account in view of Section 40(b)(iv) of the Act, it held that under the scheme of Chapter IV-D that assessee has to prove that it was entitled to claim deduction for payment of interest on capital borrowed u/s 36(1)(iii) and not disentitled u/s 40(b)(iv) of the Act. Hence, the decision of Munjal Sales Corporation vs CIT (supra) is entirely on different facts and not related to Section 14A of the Act. Even otherwise, the view taken by the AO is in consonance with the view taken by the Coordinate Bench of ITAT Pune Bench in the case of Quality Industries vs JCIT (2016) 161 ITD 217 wherein it was held that interest paid on capital account of the partners cannot be considered for disallowance u/s 14A of the Act. The relevant finding at Para 11.5 of the order is reproduced as under:- 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 vein, 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 characteristics of and attributable to its own capital where no disallowance under s. 14A r/w r. 8D is warranted. Consequently, the plea of the assessee is merited insofar as interest attributable to partners. However, the interest payable to parties other than partners, in our view, would be subjected to provisions of r. 8D(2)(ii) of the Rules. Similarly, in the absence of any specific plea from assessee towards disallowance under r. 8D(3), we hold it sustainable in view of express mandate of law. The 7 ITA NO. 368/JP/2023 M/S. MANGLAM ARTS VS Pr.CIT, JAIPUR -2 matter is accordingly remanded back to the file of the AO for recomputation of disallowance under r. 8D r/w s. 14A of the Act in terms of our opinion expressed hereinabove. Following the above decision, Hon’ble ITAT, Jaipur Bench in case of ASK Partners Vs. ACIT ITA No.187/JP/2017 order dt. 31.12.2018 (Case laws compilation PB 7-14) has also held that payment of interest to the partners as per the provision of partnership deed is not subject to disallowance u/s 14A read with Rule 8D(ii) of the Act. Thus when the PCIT has taken a view and that view is in accordance with the decision of Hon’ble ITAT Pune Bench and Jaipur Bench, it cannot be said that there is any mistake apparent on record. Reliance in this connection is placed on the following cases:- T.S. Balaram, ITO Vs. Volkart Brothers and others [1971] 82 ITR 50 (SC) Hon’ble Supreme Court at Para 4 of the order held as under:- 4. From what has been said above, it is clear that the question whether s. 17(1) of the Indian IT Act, 1922, was applicable to the case of the first respondent is not free from doubt. Therefore, the ITO was not justified in thinking that on that question there can be no two opinions. It was not open to the ITO to go into the true scope of the relevant provisions of the Act in a proceedings under s. 154 of the IT Act, 1961. A mistake apparent on the record must be an obvious and patent mistake and not something which can be established by a long drawn process of reasoning on points on which there may conceivably be two opinions. As seen earlier, the High Court of Bombay opined that the original assessments were in accordance with law though in our opinion the High Court was not justified in going into that question. In Satyanarayan Laxminarayan Hegde vs. Mallikarjun Bhavanappa Tirumale (1960) 1 SCR 890, this Court while spelling out the scope of the power of a High Court under Art. 226 of the Constitution ruled that an error which has to be established by a long- drawn process of reasoning on points where there may conceivably be two opinions cannot be said to be an error apparent on the face of the record. A decision on debatable point of law is not a mistake apparent from the record [see Sidhramappa Andannappa Manvi vs. CIT (1952) 21 ITR 333 (Bom)]. The power of the officers mentioned in s. 154 of the IT Act, 1961, to correct "any mistake apparent from the record" is undoubtedly not more than that of the High Court to entertain a writ petition on the basis of an "error apparent on the face of the record." In this case it is not necessary for us to spell out the distinction between the expression "error apparent on the face of the record" and "mistake apparent from the 8 ITA NO. 368/JP/2023 M/S. MANGLAM ARTS VS Pr.CIT, JAIPUR -2 record". But suffice it to say that the ITO was wholly wrong in holding that there was a mistake apparent from the record of the assessments of the first respondent. CIT Vs. Hero Cycles Pvt. Ltd. (1997) 228 ITR 463 (SC) Hon’ble Supreme Court at Para 3 of the order held that rectification is not possible if the question is debatable.’’ In view of the above deliberation and the case laws cited (supra), the Bench does not concur with the findings of the ld. PCIT and thus the appeal of the assessee is allowed. 3.0 In the result, the appeal of the assessee is allowed Order pronounced in the Open Court on 30 /08/2023 Sd/- Sd/- ¼ jkBksM deys'k t;UrHkkbZ ½ ¼lanhi xkslkbZ½ (Rathod Kamlesh Jayantbhai) (Sandeep Gosain) ys[kk lnL;@Accountant Member U;kf;d lnL;@Judicial Member Tk;iqj@Jaipur fnukad@Dated:- 30 /08/2023 *Mishra vkns'k dh izfrfyfi vxzsf’kr@Copy of the order forwarded to: 1. The Appellant- M/s. Manglam Arts, Jaipur 2. izR;FkhZ@ The Respondent- Pr. CIT, Jaipur-2 3. vk;dj vk;qDr@ The ld CIT 4. foHkkxh; izfrfuf/k] vk;dj vihyh; vf/kdj.k] t;iqj@DR, ITAT, Jaipur 5. xkMZ QkbZy@ Guard File (ITA No. 368/JP/2023) vkns'kkuqlkj@ By order, lgk;d iathdkj@Asstt. Registrar
AI Insights
The case involves M/s. Manglam Arts, which appealed against the order of the PCIT, Jaipur-2, concerning the assessment year 2018-19. The PCIT had initially discussed the issue of disallowance under Section 14A of the Income Tax Act in an order dated 29-03-2023, where it was decided that the interest paid to partners on their capital accounts was not to be considered for disallowance under Section 14A. However, in a subsequent order dated 31-05-2023, the PCIT issued a notice under Section 154, stating that the interest paid to partners was an expenditure and should be considered for disallowance under Section 14A. The Tribunal found that this constituted a change of opinion rather than a rectification of a mistake apparent from the record, leading to the allowance of the assessee's appeal.
