Shankar Chemicals Works, Ahmedabad V. The Dy,CIT.,Circle-12, Ahmedabad

ITA 379/AHD/2008

• Counselvise Citation: [2011] 134 COUNSELVISE.COM (IT) 6477 (ITAT-AHMEDABAD)
• Duration Of Justice: 3 year(s) 4 month(s) 7 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 09-06-2011
• Appeal Filed By: Assessee
• Order Result: Dismissed
• Bench Allotted: B
• Next Hearing Date: 27-04-2011
• Assessment Year: 2004-2005
• Appeal Filed On: 01-02-2008
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Assessee Lawyers: JAIMIN GANDHIARS; S N SOPARKAR
• Keywords: Business income; Earning of tax free income; Proportionate interest
• Section: 143(3); 14A; 28; 10; 154

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL B BENCH : AH MEDABAD ( BEFORE HONBLE SHRI T.K.SHARMA, J.M. & HONBLE SHRI A.K.GARODIA, A.M.) I.T.A.NO. 379/AHD./2008 : ASSESSMENT YEAR 2004 -05 M/S. SHANKAR CHEMICALS WORKS, AHMEDABAD VS- DCIT, CIRCLE-12, AHMEDABAD (PAN : AAKFS 9416Q) (APPELLANT) (RESPONDENT) APPELLANT BY : SHRI S.N.SOPARKAR & SHRI JAIMI N GANDHI, A.RS RESPONDENT BY: SHRI K. MADHUSUDAN O R D E R PER SHRI T.K.SHARMA, JUDICIAL MEMBER THIS APPEAL IS FILED BY THE ASSESSEE AGAINST THE OR DER OF LD. CIT(A)-XX, AHMEDABAD DATED 09.10.2007 FOR THE ASSESSMENT YEAR 2004-2005. 2. BRIEFLY STATED, THE FACTS ARE THAT THE ASSESSEE IS A FIRM CARRYING ON BUSINESS OF MANUFACTURING OF CHEMICALS, PARTICULARLY SODIUM \BI SULPHATE FOR WHICH RAW MATERIAL SODA ASH AND SULPHAR IS BEING USED. FOR THE ASSESSM ENT YEAR UNDER APPEAL, IT FILED THE RETURN OF INCOME ON 21.10.2004 DECLARING TOTAL INCO ME AT RS.17,83,800/-. IN THIS RETURN OF INCOME, THE ASSESSEE CLAIMED AN EXEMPT INCOME OF RS.43,47,990/-. THE AO FRAMED THE ASSESSMENT UNDER SECTION 143(3) WHEREIN HE DISA LLOWED RS.17,04,535/- UNDER SECTION 14A OF THE I.T. ACT. FOR MAKING THIS DISALL OWANCE, IN THE ASSESSMENT ORDER, THE AO OBSERVED FROM THE BALANCE-SHEET THAT THE ASSESSE E HAD MADE INVESTMENT IN VARIOUS ASSETS, WHICH ARE DEBENTURES AND BONDS, MUTUAL FUND S AND SHARES PURCHASED, ETC. AND INCOME DERIVED FROM WHICH IS NOT FORMING PART OF TO TAL INCOME. THE VALUE OF SUCH INVESTMENT WAS SHOWN AS ON 31/3/2004 AT RS.1,92,89, 640/- AND THE TOTAL DIVIDEND INCOME DERIVED WAS OF RS.43,47,992/-, WHICH WAS NOT INCLUDED IN THE COMPUTATION OF TAXABLE INCOME. THE ASSESSING OFFICER ALSO NOTED TH AT THOUGH THIS INCOME WAS CLAIMED AS EXEMPT, THE VARIOUS EXPENSES WHICH WERE INCURRED FOR THE EARNING OF THIS INCOME WERE DEBITED TO PROFIT & LOSS ACCOUNT. ON BE ING ASKED TO SHOW CAUSE AS TO ITA NO.379/AHD/2008 2 WHY THE PROPORTIONATE INTEREST EXPENDITURE OF RS.23 ,23,206/-, CLAIMED TO HAVE BEEN INCURRED FOR THE EARNING OF THE ABOVE EXEMPTED DIVI DEND INCOME SHOULD NOT BE DISALLOWED AND ADDED BACK TO THE TOTAL INCOME, THE ASSESSEE CONTENDED AS UNDER: THE ASSESSEE HAS NOT INCURRED ANY EXPENDITURE IN RE LATION TO EXEMPT DIVIDEND INCOME. THE ASSESSEE HAS PAID INTEREST TO ITS DEPOSITORS FO R WHOM THE DEPOSITS WERE OBTAINED IN EARLIER YEARS WHERE THERE WERE NO INVESTMENTS BY THE ASSESSEE. THEREFORE, THE INTEREST PAID TO DEPOSITOR S IS NOT IN RELATION TO DIVIDEND INCOME. THE ASSESSEE FIRM HAS PAID INTEREST ON THE CAPITAL OF THE PARTNERS @10.5% P.A. THE INTEREST PAID TO PARTNERS ON THEIR CAPITAL ACCOUNT, WHICH IS NOT AUTHORISED BY OR IS NOT IN ACCORDANCE WITH THE TERMS OF THE PARTNERSHIP DEED, IS NOT DEDUCTIBLE U/S.40(B)(II) OF THE I.T. A CT, 1961. THUS INTEREST ON PARTNERS CAPITAL IS DEDUCTIBLE AMOUNT ON FULFILMENT OF THE CONDITIONS LAID DOWN IN SECTION 40(B)(II) OF THE I.T. ACT, 1961. THIS IS NOT AN EXPENDITURE CLAIMED AGAINST THE EXEMPTED DIVIDEND INCOME. THIS IS NOT L IKE INTEREST EXPENDITURE ALLOWABLE U/S.36(1)(III) OF THE I.T. ACT, 1961. NO TAX IS DEDUCTIBLE AT SOURCE FROM THIS INTEREST PAYMENT. INTEREST TO PARTNERS IS TAXABLE U/S.28(V) UNDER THE HEAD BUSINESS OR PROFESSION. IN SHORT PAYMENT OF IN TEREST TO PARTNERS IS A SPECIAL DEDUCTION AVAILABLE TO THE ASSESSEE ON FULF ILMENT OF THE CONDITIONS FOR ITS ALLOWABILITY MENTIONED IN THE SECTION 40(B) OTH ERWISE IT IS NOT DEDUCTIBLE AMOUNT IN COMPUTATION OF TOTAL INCOME. WHEREAS SECT ION 14A DEALS WITH THE EXPENDITURE INCURRED IN RELATION TO EXEMPTED INCOME . THIS IS THE GENERAL PROVISIONS OF LAW IN RESPECT OF THE DISALLOWANCE OF THE EXPENDITURE RELATING TO EXEMPTED INCOME, WHICH DOES NOT COVER THE SPECIAL P ROVISION OF LAW WHICH ALLOWS THE DEDUCTION OF THE AMOUNT ON FULFILMENT OF THE CERTAIN CONDITIONS. PREVIOUSLY, PRIOR TO A.Y. 1993-94, INTEREST PAID TO PARTNERS WAS NOT ALLOWABLE AS A DEDUCTION IN COMPUTATION OF TOTAL IN COME. VIDE FINANCE ACT, 1992 THE TAXATION OF THE FIRMS HAS BEEN RESTRUCTURE D AND INTEREST PAID TO PARTNERS BECOME ALLOWABLE DEDUCTION PROVIDED SUCH I NTEREST PAYMENT DOES NOT EXCEED SPECIFIED PERCENTAGE AND IT IS AUTHORISED BY THE PARTNERSHIP DEED. THE COPY OF THE MEMORANDUM EXPLAINING PROVISIONS IN FIN ANCE ACT, 1992 IS ENCLOSED FOR YOUR REFERENCE. VIDE PARA 48 OF THE CIRCULAR NO.636 DATED 31/8/2001 THE CBDT HAS EXPLAINED THE PROVISIONS OF THE FINANCE ACT, 1992 R EGARDING THE ASSESSMENT OF THE FIRM. IN THE SAID CIRCULAR, IN PARA-48.2, IT IS STATED THAT THE SHARE OF THE PARTNER IN THE FIRM WILL NOT BE INCLUDED IN COMPUTI NG HIS TOTAL INCOME (SECTION 19(2A)). HOWEVER, INTEREST, SALARY, BONUS, COMMISSI ON OR ANY OTHER REMUNERATION ALLOWED BY THE FIRM TO PARTNER WILL BE LIABLE TO BE TAX AS BUSINESS INCOME IN THE PARTNERS HAND [SECTION 2(24)(VE) AND SECTION 28(V)]. AN ITA NO.379/AHD/2008 3 EXPLANATION HAS BEEN ADDED TO THE NEWLY INSERTED CL AUSE (2A) OF SECTION 10 TO MAKE IT CLEAR THAT THE REMUNERATION OR INTEREST WHI CH IS DISALLOWED IN THE HANDS OF THE FIRM WILL NOT SUFFER TAXATION IN THE HANDS O F THE PARTNER. THUS, IF THE INTEREST IS DISALLOWED IN CASE OF THE FIRM THAN IT WILL NOT BE TAXED IN THE CASE OF PARTNER. IT MAY BE NOTED THAT IN THE CASE OF THE AS SESSEE FIRM THE PARTNERS TO WHOM INTEREST IS PAID ARE TAXABLE AT THE MAXIMUM RA TE. THE COPY OF THE RELEVANT PORTION OF THE CBDT CIRCULAR IS ENCLOSED. THE AMENDMENT IN THE ASSESSMENTS OF THE FIRM HAS BE EN MADE TO AVOID THE DOUBLE TAXATION OF INCOME. THE INTEREST PAID TO PARTNERS IS DISTRIBUTION OF THE PROFIT ALLOCATED TO THE PARTNERS IN THE FORM OF INTEREST. AS PER THE PROVISIONS OF THE INCOME-TAX ACT, THE INTEREST TO PARTNERS CAN BE TAXED ONCE EITHER IN THE HANDS OF THE FIRM OR PARTNERS. IT CANNOT BE TAXED I N THE BOTH PLACES. SINCE, THE PARTNERS HAVE PAID TAXES ON THE INTEREST RECEIVED F ROM THE FIRM AND ALL THE CONDITIONS LAID DOWN IN THE PROVISIONS OF SECTION 4 0(B)(V) HAS BEEN FULFILLED, NO PORTION OF THE INTEREST TO PARTNERS CAN BE DISALLOW ED. IF IT IS DISALLOWED, IT WILL AMOUNT TO DOUBLE TAXATION... 2.1 ON THE BASIS OF ABOVE, THE ASSESSEE CONTENDED B EFORE THE AO THAT NO DISALLOWANCE UNDER SECTION 14A SHOULD BE MADE OUT O F INTEREST EXPENSES. AFTER CONSIDERING THE AFORESAID SUBMISSIONS, IN THE IMPUG NED ORDER, THE AO CONCLUDED THAT INVESTMENTS IN ALL THESE MUTUAL FUNDS, SHARE AND SE CURITIES HAVE BEEN DONE OUT OF THE FIRMS FUNDS, WHICH WAS NOTHING BUT EITHER PARTNERS CAPITAL OR OUTSIDE BORROWINGS. THE INTEREST PAYMENTS ON THESE FUNDS WERE MADE EITH ER TO PARTNERS OR TO THE PERSONS FROM WHOM BORROWINGS ARE MADE. IT WAS ALSO HELD THA T THE PROVISIONS OF SECTION 14A HAVE BEEN INSERTED RETROSPECTIVELY WITH A VIEW TO C URB THE PRACTICE TO CLAIM ALL THE EXPENSES WHICH ARE INCURRED IN CONNECTION WITH THE EARNING OF INCOMES, WHICH DO NOT FORM PART OF THE TOTAL INCOME. THE ASSESSING OFFICE R ALSO STATED THAT IT WAS ALSO NOT CORRECT THAT ENTIRELY THE FIRMS OWN FUNDS WERE UTI LISED IN MAKING THE INVESTMENTS IN ALL THE ASSETS UNDER REFERENCE AS THE APPELLANT SHO WN TOTAL BORROWINGS OF RS.15,57,624/- IN THE BALANCE SHEET AS ON 31/3/2004 . ALL THE DEPOSITS WERE INTEREST- BEARING AND TOTAL INTEREST CLAIMED WAS RS.1,53,799/ -, APART FROM THE INTEREST PAID TO THE PARTNERS ON THEIR CAPITAL. REFERRING TO THE PROVISI ONS OF SECTION 155(1A) THAT ANY REMUNERATION TO ANY PARTNER IS NOT DEDUCTIBLE UNDER CLAUSE (B) OF SECTION 40, THE ASSESSING OFFICER MAY AMEND THE ORDER OF ASSESSMENT OF THE PARTNER WITH A VIEW TO ADJUSTING THE INCOME OF THE PARTNER TO THE EXTENT O F THE AMOUNT NOT SO DEDUCTIBLE; AND ITA NO.379/AHD/2008 4 THE PROVISIONS OF SECTION 154 SHALL, SO FAR AS MAY BE, APPLY THERETO, THE PERIOD OF FOUR YEARS SPECIFIED IN SUB-SECTION (7) OF THAT SECTION BEING RECKONED FROM THE END OF THE FINANCIAL YEAR IN WHICH THE FINAL ORDER WAS PASSED IN THE CASE OF THE FIRM, THE ASSESSING OFFICER STATED THAT IT IS APPARENT THAT T HE PARTNERS ASSESSMENTS ARE TO BE REVISED TO DEDUCT THE REMUNERATION ADDED, IF ANY, A ND THERE WAS NO MENTION REGARDING DEDUCTION OF THE INTEREST TAXED IN THE HANDS OF THE PARTNERS. THE ASSESSING OFFICER ALSO FOUND THAT BY REFERRING THE BOARD CIRCULAR, ETC. TH E APPELLANT MADE AN ATTEMPT TO GO THROUGH THE LEGISLATIVE HISTORY OF THE INSERTION OF SECTION 40(B) OF THE I.T. ACT AND THE AMENDMENT OF THE RELATED PROVISIONS OF THE REGISTRA TION OF THE FIRM. THIS REFERENCE IS NOT CONSIDERED BY THE ASSESSING OFFICER AS HE FELT THAT THE INSERTION OF PROVISIONS OF SECTION 14A ARE ALTOGETHER SEPARATE PIECE OF LEGISL ATION FOR THE DISTINCT PURPOSE AS MENTIONED ABOVE. CONSIDERING ALL THE ABOVE FACTS, H E DISALLOWED AN AMOUNT OF RS.17,04,535/- OUT OF THE TOTAL INTEREST EXPENSES O F RS.23,23,206/- AND ADDED TO THE TOTAL INCOME OF THE ASSESSEE. 3. ON APPEAL BEFORE THE LD. CIT(A), THE ASSESSEE RE ITERATED THE SUBMISSIONS MADE BEFORE THE AO. IN THE IMPUGNED ORDER, THE LD. CIT(A ) UPHELD THE DISALLOWANCE OF INTEREST UNDER SECTION 14A FOR THE DETAILED REASONS GIVEN IN PARA 2.3 WHICH IS EXTRACTED BELOW. 2.3 THE FACTS OF THE CASE AND THE SUBMISSIONS OF THE AUTHORISED REPRESENTATIVE HAVE BEEN CAREFULLY CONSIDERED. AS R IGHTLY OBSERVED BY THE ASSESSING OFFICER THAT THE SOURCE OF INVESTMENT IN MUTUAL FUNDS, SHARES AND DEBENTURES & BONDS IS MADE FROM NO OTHER SOURCE BUT CAPITAL EMPLOYED BY THE PARTNERS (WHICH INCLUDES ACCUMULATED PROFITS EARNED IN PREVIOUS YEARS) TAKING INTO ACCOUNT THE TOTAL BORROWINGS OF THE ASSESSEE A T RS.15,57,624/- AND THE TOTAL INVESTMENTS MADE OF RS.1,92,89,640/-. THE ASS ESSING OFFICER HAS RIGHTLY DISALLOWED PROPORTIONATE PART OF INTEREST, WHICH AM OUNTS TO RS.17,04,535/- U/S.14A AS THE CAPITAL WAS EMPLOYED FOR THE PURPOSE OF INVESTMENT IN MUTUAL FUNDS, SHARES AND DEBENTURES & BONDS AND NOT FOR TH E BUSINESS OF THE ASSESSEE FIRM FOR WHICH THE PARTNERSHIP DEED WAS FORMED. THE PROVISION OF SECTION 40(B) IS ALSO NOT APPLICABLE IN THIS CASE AS THE FUNDS AR E UTILISED FOR THE PURPOSE OF INVESTMENT RATHER THAN THE BUSINESS AS STATED IN PA RTNERSHIP DEED. THE WORKING OF THE DISALLOWANCE OF INTEREST MADE BY THE ASSESSI NG OFFICER IN PROPORTION TO THE AMOUNT OF INVESTMENT AND TOTAL FUNDS EMPLOYED I S RIGHTLY MADE AND THE ITA NO.379/AHD/2008 5 ASSESSEES PLEA FOR APPLICATION OF OTHER METHOD IS SUMMARILY REJECTED. THE PARTNERS OF THE FIRM ARE ENTITLED TO RELIEF AS GIVE N UNDER EXPLANATION TO NEWLY INSERTED CLAUSE (2A) OF SECTION 10 IN RESPECT OF TA XABLE PART OF INTEREST OF THE FIRM. CONSIDERING ALL THE ABOVE FACTS, THE ADDITION MADE BY THE ASSESSING OFFICER IS CONFIRMED AND THE GROUND RAISED BY THE A PPELLANT IS REJECTED. 4. AGGRIEVED, THE ASSESSEE IS IN APPEAL BEFORE THE TRIBUNAL ON THE FOLLOWING GROUNDS: 1) THE LEARNED COMMISSIONER(A) FAILED TO UNDERSTAND THE FACTS AND CIRCUMSTANCES OF THE CASE. 2) THE LEARNED COMMISSIONER(A) ERRED IN CONFIRMING THE DISALLOWANCE OF RS.17,04,535/- U/S 14A, CONSIDERING THE SAME AS EXP ENDITURE INCURRED FOR THE PURPOSE OF EARNING TAX-FREE DIVIDEND INCOME, OUT OF INTEREST PAID ON PARTNERS CAPITAL. FURTHER, THE INTEREST PAID ON PARTNERS CAP ITAL, WHICH IS OTHERWISE ALLOWABLE U/S 40(B) OF THE I.T. ACT, 1961. 3) THE LEARNED COMMISSIONER(A) ERRED IN HOLDING TH AT THE PROVISION OF SECTION 40(B) IS NOT APPLICABLE AS THE FUNDS ARE UTILISED F OR THE PURPOSE OF INVESTMENT RATHER THAN INVESTMENT AS STATED IN PARTNERSHIP DEE D. 4) ALTERNATIVELY, WITHOUT PREJUDICE TO THE ABOVE GR OUND NO.2, THE LEARNED COMMISSIONER (A) ERRED IN CONFIRMING THE WORKING OF THE DISALLOWANCE OF INTEREST IN PROPORTION TO THE AMOUNT OF INVESTMENT AND TOTAL FUNDS APPLIED INSTEAD OF IN PROPORTION TO TAXABLE AND NON-TAXABLE INCOME EARNED FOR PAYMENT OF INTEREST. 5. AT THE TIME OF HEARING BEFORE US, ON BEHALF OF T HE ASSESSEE, SHRI S.N.SOPARKAR ALONG WITH SHRI JAIMIN GANDHI APPEARED AND FILED A PAPER BOOK CONTAINING 8 PAGES WHICH, INTER ALIA , INCLUDE (1) SUBMISSIONS BEFORE CIT(A) - 1 TO 4 PA GES, (2) COMPARATIVE TAX WORKING AT PAGE NO.5, (3) BALANCE- SHEET & PROFIT & LOSS A/C. AT PAGE NOS.6 & 7 AND (4) ALTERNATIVE CALCULATION OF I NTEREST DISALLOWANCE U/S 14A AT PAGE NO.8. THE FIRST CONTENTION RAISED BY THE ASSES SEE IS THAT NO NEXUS IS ESTABLISHED. THEREFORE, FOLLOWING THE DECISION OF HONBLE GUJARA T HIGH COURT IN THE CASE OF CIT- VS- GUJARAT POWER CORPORATION LTD. IN TAX APPEAL NO .1587 OF 2009 DELIVERED ON 28.3.2011 (UNREPORTED), THE DISALLOWANCE OF RS.17,0 4,535/- MADE UNDER SECTION 14A BE DELETED. AS AGAINST THIS, THE LD. D.R. POINTED O UT THAT NO INTEREST-FREE FUNDS WERE ITA NO.379/AHD/2008 6 AVAILABLE TO THE ASSESSEE. THEREFORE, DISALLOWANCE HAS RIGHTLY BEEN MADE. IT IS PERTINENT TO NOTE THAT NO INTEREST-FREE FUNDS WERE AVAILABLE. THE INVESTMENTS WERE MADE FROM CAPITAL OF THE PARTNERS ON WHICH INTEREST @10.5% P.A. IS PAID. THEREFORE, THIS PLEA OF THE ASSESSEES COUNSEL IS HEREBY REJEC TED. 5.1 THE SECOND PLEA RAISED BY THE LD. COUNSEL OF TH E ASSESSEE IS THAT AS PER CLAUSE (V) OF SECTION 28 OF THE I.T. ACT, 1961, INTEREST P AID TO PARTNER OF A FIRM IS CHARGEABLE TO TAX. THEREFORE, DISALLOWANCE OF INTEREST UNDER S ECTION 14A WILL AMOUNT TO DOUBLE DISALLOWANCE. TO BUTTRESS THIS CONTENTION, THE LD. COUNSEL OF THE ASSESSEE SUBMITTED THAT FIRM AND PARTNERS ARE NOT DIFFERENT ENTITY. ON THE OTHER HAND, THE LD. D.R. POINTED OUT THAT FIRM IN QUESTION IS A REGISTERED FIRM. INT EREST ON CAPITAL PAID TO PARTNERS AMOUNTING TO RS.21,66,108/- HAS BEEN ALLOWED UNDER SECTION 40(B)(II) OF THE I.T. ACT, 1961. THIS EXPENSES HAS BEEN CLAIMED AGAINST EXEMPT ED DIVIDEND INCOME. THEREFORE, WHETHER THIS EXPENSE IS CLAIMED OR ALLOWED UNDER SE CTION 36(1)(III) OR 40(B)(II) WILL NOT MAKE ANY DIFFERENCE FOR THE PURPOSE OF APPLYING PROVISIONS OF SECTION 14A OF THE I.T. ACT, 1961. IN REJOINDER, THE COUNSEL OF THE AS SESSEE DREW OUR ATTENTION TO PARA 48 OF CIRCULAR NO.636 DATED 31.8.1992 WHEREIN CBDT HAS EXPLAINED THE PROVISIONS OF FINANCE ACT, 1992 REGARDING ASSESSMENT OF THE FIRM. IN THE SAID CIRCULAR IN PARA 48.2, IT IS STATED THAT SHARES OF PARTNER IN A FIRM WILL NOT BE INCLUDED IN COMPUTING HIS TOTAL INCOME UNDER SECTION 10(2A). HOWEVER, INTEREST, SAL ARY, BONUS, COMMISSION, OR ANY OTHER REMUNERATION ALLOWED BY THE FIRM TO THE PARTN ER WILL BE LIABLE TO TAX AS BUSINESS INCOME IN THE PARTNERS HAND [SECTION 2(24)(VE)] AN D 28(V). AN EXPLANATION HAS BEEN ADDED TO THE NEWLY INSERTED CLAUSE(2A) OF SECTION 1 0 TO MAKE IT CLEAR THAT THE REMUNERATION OR INTEREST, WHICH IS DISALLOWED IN TH E HANDS OF THE FIRM, WILL NOT SUFFER TAXATION IN THE HANDS OF THE PARTNER. THUS, IF THE INTEREST IS DISALLOWED IN CASE OF THE FIRM THEN IT WILL NOT BE TAXED IN THE CASE OF THE P ARTNER. IT MAY BE NOTED THAT IN CASE OF THE ASSESSEE FIRM, THE PARTNERS TO WHOM INTEREST IS PAID ARE TAXABLE AT THE MAXIMUM RATE. HE FURTHER SUBMITTED THAT AMENDMENT IN THE AS SESSMENT OF A FIRM HAS BEEN MADE TO AVOID DOUBLE TAXATION OF THE INCOME. INTEREST PA ID TO PARTNERS IS DISTRIBUTION OF PROFIT ALLOCATED TO THE PARTNERS IN THE FORM OF INT EREST. INTEREST TO PARTNERS CAN BE TAXED ONCE EITHER IN THE HANDS OF THE FIRM OR IN THE PART NERS HAND. IT CANNOT BE TAXED IN BOTH ITA NO.379/AHD/2008 7 PLACES. SINCE, THE PARTNERS HAVE PAID TAX ON INTERE ST RECEIVED FROM THE FIRM AND ALL THE CONDITIONS LAID DOWN IN THE PROVISIONS OF SECTION H AVE BEEN FULFILLED, NO PORTION OF INTEREST PAID TO PARTNERS CAN BE DISALLOWED. IF IT IS DISALLOWED, IT WILL AMOUNT TO DOUBLE TAXATION. 6. WE HAVE HEARD BOTH THE SIDES ON VARIOUS PLEAS B UT WE ARE NOT SATISFIED. WE DECIDE EACH AND EVERY CONTENTION RAISED BY THE LD. COUNSEL OF THE ASSESSEE. THE FIRST CONTENTION RAISED BY HIM HAS ALREADY BEEN REJECTED BY US IN PARA NO.5 ABOVE. REGARDING THE SECOND CONTENTION RAISED BY HIM THAT ANY DISALLOWANCE OF INTEREST UNDER SECTION 14A WILL AMOUNT TO DOUBLE DISALLOWANCE, WE WOULD LIKE TO POINT OUT THAT THIS CONTENTION IS ALSO DEVOID OF ANY MERIT. FOR THE PUR POSE OF DECIDING THIS ASPECT, WE FIRST REPRODUCE THE PROVISIONS OF SUB-SECTION (1) OF SECT ION 14A, WHICH IS AS UNDER: 14A.(1) FOR THE PURPOSES OF COMPUTING THE TOTAL I NCOME UNDER THIS CHAPTER, NO DEDUCTION SHALL BE ALLOWED IN RESPECT OF EXPENDI TURE INCURRED BY THE ASSESSEE IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THIS ACT. 6.1 AS PER THE PROVISIONS CONTAINED IN SECTION 14A( 1) AS REPRODUCED ABOVE, WE FIND THAT THE EXPENDITURE INCURRED FOR EARNING EXEMPT IN COME SHALL NOT BE CONSIDERED FOR COMPUTING TOTAL INCOME UNDER CHAPTER IV. IT IMPLIES THAT SUCH EXPENDITURES ARE TO BE ALLOWED AS DEDUCTION, WHILE WORKING OUT EXEMPT INCO ME UNDER CHAPTER-III. HENCE UNDER SECTION 14A, ONLY SOME SPECIFIC TREATMENT IS TO BE GIVEN TO THOSE EXPENDITURE, WHICH ARE INCURRED FOR EARNING EXEMPT INCOME. THIS TREATMENT IS THIS THAT THOSE EXPENSES SHOULD BE DISREGARDED FOR COMPUTING TOTAL INCOME UNDER CHAPTER IV AND SHOULD BE REDUCED FROM EXEMPT INCOME UNDER CHAPTER III. HENCE, THERE IS NO DOUBLE ADDITION OR DOUBLE DISALLOWANCE. PARTNERS HAVE SHAR E IN ALL THE INCOMES OF THE FIRM. AS PER THE AFORESAID TREATMENT IN THE HANDS OF THE FIR M REGARDING EXPENSES INCURRED FOR EARNING EXEMPT INCOME, TAXABLE INCOME OF THE FIRM W ILL INCREASE AND EXEMPT INCOME OF THE FIRM WILL GO DOWN BY SAME AMOUNT AND HENCE T OTAL OF BOTH WILL REMAIN SAME. THE TOTAL SHARE OF PROFIT OF THE PARTNER IN THE INC OME OF THE FIRM WILL ALSO REMAIN SAME BUT HIS SHARE IN THOSE INCOME, WHICH ARE EXEMPT IN THE HANDS OF THE FIRM, WILL BE LESS AND THE SHARE IN THOSE INCOME, WHICH ARE TAXABLE IN THE HANDS OF THE FIRM, WILL BE MORE ITA NO.379/AHD/2008 8 BUT THE ENTIRE SHARE OF PROFIT RECEIVABLE BY A PART NER FROM A FIRM IS EXEMPT AND HENCE THERE IS NO IMPACT IN THE HANDS OF THE PARTNER. SIN CE THERE IS NO DISALLOWANCE AS SUCH IN THE HANDS OF THE FIRM AND THE EXPENDITURE INCURRED FOR EARNING EXEMPT INCOME ARE NOT ALLOWED TO BE REDUCED FROM TAXABLE INCOME BUT CAN B E REDUCED FROM EXEMPT INCOME, THERE IS NO EFFECTIVE DISALLOWANCE IN THE HANDS OF THE FIRM FOR THE EXPENSES INCURRED FOR EARNING EXEMPT INCOME AND HENCE THERE IS NO QUE STION OF ANY DOUBLE DISALLOWANCE OR DOUBLE ADDITION. THEREFORE, THIS PLEA OF THE LD. COUNSEL OF THE ASSESSEE IS ALSO REJECTED. 6.2 ONE MORE CONTENTION RAISED BY THE LD. COUNSEL O F THE ASSESSEE IS THAT IF AT ALL ANY DISALLOWANCE HAS TO BE MADE IN THE HANDS OF THE FIRM, DIRECTION SHOULD BE GIVEN THAT, TO THAT EXTENT, INTEREST INCOME SHOULD NOT BE TAXED IN THE HANDS OF CONCERNED PARTNERS. IN THIS REGARD, HE DREW OUR ATTENTION TO THE PROVISIONS OF SECTION 28(V), WHICH READS AS UNDER: 28.(V) ANY INTEREST, SALARY, BONUS, COMMISSION OR R EMUNERATION, BY WHATEVER NAME CALLED, DUE TO, OR RECEIVED BY, A PARTNER OF A FIRM FROM SUCH FIRM: PROVIDED THAT WHERE ANY INTEREST, SALARY, BONUS, COMMISSION OR REMUNERATION, BY WHATEVER NAME CALLED, OR ANY PART THEREOF HAS NO T BEEN ALLOWED TO BE DEDUCTED UNDER CLAUSE (B) OF SECTION 40, THE INCOME UNDER THIS CLAUSE SHALL BE ADJUSTED TO THE EXTENT OF THE AMOUNT NOT SO ALLOWED TO BE DEDUCTED 6.3 FROM THE ABOVE PROVISO TO SECTION 28 (V), IT I S SEEN THAT IF THERE IS ANY DISALLOWANCE OF INTEREST IN THE HANDS OF THE FIRM D UE TO CLAUSE (B) OF SECTION 40, INCOME IN THE HANDS OF THE PARTNER HAS TO BE ADJUST ED TO THE EXTENT OF THE AMOUNT NOT SO ALLOWED TO BE DEDUCTED IN THE HANDS OF THE FIRM. HE NCE, IT IS SEEN THAT THE OPERATION OF THE PROVISO TO SECTION 28(V) WILL COME INTO PLAY ON LY IF THERE IS SOME DISALLOWANCE IN THE HANDS OF THE FIRM UNDER CLAUSE (B) OF SECTION 4 0 BUT IN THE PRESENT CASE, THE DISALLOWANCE IS UNDER SECTION 14A AND NOT UNDER SEC TION 40(B) AND THEREFORE, THE PROVISO TO SECTION 28(V) IS NOT APPLICABLE AND THE PARTNER OF THE ASSESSEE FIRM DID NOT DESERVE ANY RELIEF ON THIS ACCOUNT. MOREOVER, BEFOR E US IS THE ASSESSEE FIRM ONLY AND NOT THE PARTNERS AND HENCE, WE DO NOT GIVE ANY DIRE CTION ON THIS ASPECT. ITA NO.379/AHD/2008 9 6.4 THE LD. COUNSEL OF THE ASSESSEE ALSO DREW OUR A TTENTION TO THE PROVISIONS OF SUB- SECTION (2A) OF SECTION 10 AND ITS EXPLANATION AND IT HAS BEEN CONTENDED THAT AS PER THE PROVISIONS OF THIS EXPLANATION TO SECTION 10(2A), R EMUNERATION OR INTEREST, WHICH IS DISALLOWED IN THE HANDS OF THE FIRM, WILL NOT SUFFE R TAXATION IN THE HANDS OF THE PARTNER. THIS CONTENTION OF THE LD. COUNSEL OF THE ASSESSEE IS ALSO DEVOID OF ANY MERIT. WE REPRODUCE THE RELEVANT PROVISION, WHICH IS AS UNDER : 10.(2A) IN THE CASE OF A PERSON BEING A PARTNER OF A FIRM WHICH IS SEPARATELY ASSESSED AS SUCH, HIS SHARE IN THE TOTAL INCOME OF THE FIRM. EXPLANATION- FOR THE PURPOSES OF THIS CLAUSE, THE S HARE OF A PARTNER IN THE TOTAL INCOME OF A FIRM SEPARATELY ASSESSED AS SUCH SHALL, NOTWITHSTANDING ANYTHING CONTAINED IN ANY OTHER LAW, BE AN AMOUNT WHICH BEAR S TO THE TOTAL INCOME OF THE FIRM THE SAME PROPORTION AS THE AMOUNT OF HIS S HARE IN THE PROFITS OF THE FIRM IN ACCORDANCE WITH THE PARTNERSHIP DEED BEARS TO SUCH PROFITS. 6.5 FROM THE ABOVE PROVISION, WE FIND THAT IT HAS B EEN SPECIFIED IN THE SAME THAT SHARE OF A PARTNER IN THE TOTAL INCOME OF A FIRM IS EXEMPT. THERE IS NO DISPUTE ON THIS ASPECT. WHAT IS BEING CONTENDED BY THE LD. COUNSEL OF THE ASSESSEE IS THIS, THAT IF ANY INTEREST IS DISALLOWED IN THE HANDS OF THE FIRM, TH E SAME SHOULD NOT FORM PART OF TOTAL INCOME IN THE HANDS OF THE PARTNER BUT THE EXPLANAT ION TO SECTION 10(2A) DOES NOT SUPPORT HIS CASE. IN OUR HUMBLE UNDERSTANDING, AS P ER THIS EXPLANATION TO SECTION 10(2A), THE TOTAL INCOME OF THE FIRM, AS ASSESSED, SHOULD BE CONSIDERED AND THE SHARE OF THE CONCERNED PARTNER SHOULD BE WORKED OUT, AS P ER ITS PROFIT-SHARING RATIO, AS SPECIFIED IN THE PARTNERSHIP DEED AND SUCH SHARE OF THE RELEVANT PARTNER SHOULD BE CONSIDERED AS EXEMPT UNDER SECTION 10(2A). HENCE, T HIS CONTENTION OF THE LD. COUNSEL IS ALSO REJECTED. 6.6 NEXT CONTENTION RAISED BY HIM IS THIS THAT INTE REST PAID TO PARTNERS IS DISTRIBUTION OF PROFIT ALLOCATED TO THE PARTNERS IN THE FORM OF INTEREST AND HENCE INTEREST TO PARTNERS CAN BE TAXED ONCE, EITHER IN THE HANDS OF THE FIRM OR IN THE HANDS OF THE PARTNER AND IT CANNOT BE TAXED IN BOTH HANDS. IT IS ALSO HIS CONTE NTION THAT SINCE THE PARTNERS HAVE PAID TAX ON INTEREST RECEIVED BY THEM FROM THE FIRM , NO PORTION OF INTEREST PAID TO PARTNERS CAN BE DISALLOWED AND IF IT IS DISALLOWED, IT WILL AMOUNT TO DOUBLE TAXATION. THIS CONTENTION OF THE LD. COUNSEL IS ALSO DEVOID O F ANY MERIT BECAUSE INTEREST TO ITA NO.379/AHD/2008 10 PARTNERS BY THE FIRM IS NOT DISTRIBUTION OF PROFIT BY THE FIRM BECAUSE INTEREST IS PAYABLE TO THE PARTNERS, IF IT IS SO PRESCRIBED IN THE PART NERSHIP DEED, EVEN IF THERE IS NO PROFIT IN THE HANDS OF THE FIRM. IF THE FIRM PAYS INTEREST TO THE PARTNERS AND THE FIRM IS HAVING LOSS, LOSS OF THE FIRM WILL INCREASE TO THAT EXTENT AND IT WILL BE ALLOWED TO CARRY FORWARD IN THE HANDS OF THE FIRM AND THEREFORE, PAYMENT OF INTEREST BY THE FIRM TO ITS PARTNERS IS NOT DISTRIBUTION OF PROFITS BY THE FIRM TO THE PART NERS. WE HAVE ALSO OBSERVED SOMEWHERE IN ABOVE PARAGRAPHS THAT THERE IS NO DISA LLOWANCE AS SUCH OF INTEREST IN THE HANDS OF THE FIRM AND ONLY THE MANNER OF ALLOWING D EDUCTION ON ACCOUNT OF INTEREST OR OTHER EXPENSES INCURRED FOR EARNING EXEMPT INCOME I S SPECIFIED IN SECTION 14A, AS PER WHICH, DEDUCTION ON ACCOUNT OF EXPENSES INCURRED FO R EARNING EXEMPT INCOME CANNOT BE ALLOWED FOR COMPUTING TOTAL INCOME UNDER CHAPTER IV AND HENCE, IMPLIEDLY, THE SAME HAS TO BE DEDUCTED FROM THE EXEMPT INCOME TO B E COMPUTED UNDER CHAPTER III. THIS CONTENTION OF LD. COUNSEL OF THE ASSESSEE IS A LSO REJECTED. 6.7 ONE MORE CONTENTION HAS BEEN RAISED BY HIM THAT SECTION 14A TALKS OF DISALLOWING EXPENDITURE INCURRED BY THE ASSESSEE IN RELATION TO EXEMPT INCOME AND INTEREST PAID TO PARTNERS IS NOT AN EXPENDITURE AT ALL AND IT IS A SPECIAL DEDUCTION ALLOWED TO THE FIRM UNDER SECTION 40(B). THIS CONTE NTION OF THE LD. COUNSEL OF THE ASSESSEE IS ALSO DEVOID OF ANY MERIT BECAUSE THERE IS NO DEDUCTION ALLOWED UNDER SECTION 40(B). IN FACT, SECTION 40(B) IS A RESTRICT ING SECTION FOR VARIOUS DEDUCTIONS ALLOWABLE UNDER SECTION 30 TO 38. AS PER CLAUSE (II ) OF SECTION 40(B), INTEREST PAID TO ANY PARTNER IS NOT ALLOWABLE, IF IT IS NOT AUTHORIS ED BY OR NOT IN ACCORDANCE WITH THE TERMS OF THE PARTNERSHIP DEED. AS PER CLAUSE (IV) O F SECTION 40(B), IT HAS BEEN SPECIFIED THAT EVEN IF PAYMENT OF INTEREST TO PARTNER IS AUTH ORISED AND IS IN ACCORDANCE WITH THE TERMS OF THE PARTNERSHIP DEED, THE INTEREST ALLOWAB LE SHOULD NOT BE MORE THAN THE AMOUNT CALCULATED @12% SIMPLE INTEREST PER ANNUM. H ENCE, WE HAVE SEEN THAT SECTION 40(B) IS ACTUALLY RESTRICTING AND REGULATING DEDUCT ION ALLOWABLE TO THE FIRM ON ACCOUNT OF PAYMENT OF INTEREST TO PARTNERS AND IS NOT AN AL LOWING SECTION. HENCE, ALLOWING SECTION FOR ALLOWING DEDUCTION OF INTEREST REMANDS SECTION 36(1)(III) AND THEREFORE, THE PAYMENT OF INTEREST TO PARTNERS IS ALSO AN EXPENDIT URE ONLY AND THEREFORE, THE SAME IS ITA NO.379/AHD/2008 11 ALSO HIT BY THE PROVISIONS OF SECTION 14A, IF IT IS FOUND THAT THE SAME HAS BEEN INCURRED FOR EARNING EXEMPT INCOME. THIS CONTENTION IS ALSO REJECTED. 6.8 THE LAST PLEA OF THE LD. COUNSEL OF THE ASSESSE E IS THAT DISALLOWANCE OF INTEREST SHOULD BE RESTRICTED TO RS.8,62,465/-, AS PER THE W ORKING GIVEN AT PAGE 8 OF THE PAPER BOOK. THE LD. COUNSEL OF THE ASSESSEE EXPLAINED THA T THIS IS AN ALTERNATIVE PLEA, WITHOUT PREJUDICE TO GROUND NO.2. ELABORATING THIS PLEA, TH E LD. COUNSEL OF THE ASSESSEE POINTED OUT THAT THE AO DISALLOWED THE INTEREST IN PROPORTI ON TO AMOUNT OF INVESTMENT AND TOTAL FUND EMPLOYED WHEREAS IT SHOULD BE IN PROPORTION TO TAXABLE AND NON-TAXABLE AND PAYMENT OF INTEREST. THIS PLEA OF THE LD. COUNSEL O F THE ASSESSEE IS ALSO LIABLE TO BE REJECTED BECAUSE IF ANY EXPENDITURE HAS BEEN INCURR ED FOR EARNING EXEMPT INCOME, THE SAME HAS TO BE DISALLOWED EVEN IF THERE IS NO ACTUA L EARNING OF ANY EXEMPT INCOME. IF INTEREST-BEARING BORROWED FUNDS ARE UTILISED FOR TH E PURPOSE OF INVESTMENT IN SHARES AND THERE IS NO RECEIPT OF DIVIDEND INCOME OR IF TH ERE IS ONLY MEAGRE AMOUNT OF DIVIDEND INCOME, EVEN THEN, THE WHOLE AMOUNT OF INT EREST EXPENDITURE INCURRED FOR THIS PURPOSE WILL BE SUBJECT TO DISALLOWANCE UNDER SECTI ON 14A BECAUSE THE SAME HAS BEEN INCURRED FOR EARNING EXEMPT INCOME. HENCE, THE ACTU AL EARNING OF EXEMPT INCOME IS NOT RELEVANT. IN THE EARLIER PERIOD, WHEN DIVIDEND INCOME WAS NOT EXEMPT, INTEREST EXPENDITURE INCURRED ON BORROWED FUNDS USED FOR INV ESTMENT IN SHARES WAS HELD TO BE FULLY ALLOWABLE EXPENSES, EVEN IF, THERE WAS NO ACT UAL RECEIPT OF DIVIDEND OR INSUFFICIENT/MEAGRE AMOUNT OF DIVIDEND INCOME. THE LOGIC WAS THAT THE ENTIRE EXPENDITURE HAS BEEN INCURRED FOR EARNING TAXABLE D IVIDEND INCOME AND HENCE, IT IS ALLOWABLE, EVEN IF THERE IS NIL OR SMALL AMOUNT OF DIVIDEND INCOME. THIS ASPECT HAS BEEN APPROVED BY VARIOUS COURTS AND HENCE, THE SAME JUDGEMENT SUPPORTS THIS VIEW ALSO THAT EVEN IN CASE OF NIL OR SMALL AMOUNT OF DIVIDEND INCOME, THE ENTIRE INTEREST EXPENDITURE INCURRED FOR MAKING INVESTMENT IN SHARE S IS TO BE CONSIDERED AS EXPENDITURE INCURRED FOR EARNING EXEMPT INCOME AND THE SAME HAS TO BE DISALLOWED UNDER SECTION 14A. HENCE, THIS PLEA IS ALSO REJECTE D. 6.9 IN VIEW OF THE ABOVE DISCUSSION, WE ARE OF THE VIEW THAT NO INTERFERENCE IS CALLED FOR IN THE ORDERS OF THE LD. CIT(A), AS PER WHICH, HE HAS CONFIRMED THE ITA NO.379/AHD/2008 12 DISALLOWANCE OF INTEREST OF RS.17,04,535/- WHICH WA S MADE BY THE AO UNDER SECTION 14A OF THE I.T.ACT. WE ARE, THEREFORE, INCLINED TO UPHOLD THE ORDER OF THE LD. CIT(A). RESULTANTLY, ALL THE GROUNDS RAISED BY THE ASSESSEE IN THIS APPEAL ARE REJECTED. 7. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS DIS MISSED. ORDER PRONOUNCED IN THE COURT ON 09.06.2011 SD/- SD/- (A.K.GARODIA) (T.K.SHARMA) ACCOUNTANT MEMBER JUDICIAL MEMBER DATED : 09/06/2011 COPY OF THE ORDER IS FORWARDED TO : 1) THE ASSESSEE 2) THE DEPARTMENT 3) CIT(A) CONCERNED 4) CIT CONCERNED 5) D.R., ITAT, AHMEDABAD TRUE COPY BY ORDER DEPUTY REGISTRAR, ITAT, AHMEDABAD TALUKDAR/SR.P.S.