SYNTHOLAB CHEMICALS & RESEARCH, MUMBAI V. ASST CIT 18(3), MUMBAI

ITA 4156/MUM/2015

• Counselvise Citation: [2017] 128 COUNSELVISE.COM (IT) 0932 (ITAT-MUMBAI)
• Duration Of Justice: 1 year(s) 9 month(s) 13 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 19-04-2017
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: Not Allotted
• Assessment Year: 2012-2013
• Appeal Filed On: 06-07-2015
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: VISHWAS MUNDHEDR
• Assessee Lawyers: B V JHAVERIAR
• Keywords: Business income; Business expenditure; Earning of tax free income
• Section: 14A; 37; 28; 10

Judgement Text

, INCOME-TAX APPELLA TE TRIBUNAL -EBENCH MUMBAI , , , BEFORE S/SHRI RAJENDRA,ACCOUNTANT MEMBER AND RAM LAL NEGI,JUDICIAL MEMBER ./I.T.A./4156/MUM/2015, /ASSESSMENT YEAR: 2012-13 M/S. SYNTHOLAB CHEMICALS & RESEARCH OFFICE NO.13 & 20, GROUND FLOOR, BHANGWADI SHOPPING ARCADE, KALBADEVI ROAD,MUMBAI- 400 002. PAN:AAACP 2682 G VS. ACIT, -18(3) EARNEST HOUSE, NARIMAN POINT MUMBAI-400 021. ( /APPELLANT ) ( / RESPONDENT ) REVENUE BY: SHRI VISHWAS MUNDHE-DR ASSESSEE BY: SHRI B.V. JHAVERI-AR /DATE OF HEARING: 15.03.2017 / DATE OF PRONOUNCEMENT:19.04.2017 ,1961 254(1) ORDER U/S.254(1)OF THE INCOME-TAX ACT,1961(ACT) / PER RAJENDRA, AM - CHALLENGING THE ORDER DATED 11/05/2015,OF CIT (A)-2 9,MUMBAI THE ASSESSEE HAS FILED THE PRESENT APPEAL.ASSESSEE-FIRM,ENGAGED IN THE BUSINESS OF MAN UFACTURING OF BULK DRUGS AND INTERMEDIATES, FILED ITS RETURN OF INCOME ON 29/09/2012,DECLARING TOTAL INCOME OF RS. 1.58 CRORE.THE ASSESSING OFFICER(AO)COMPLETED THE ASSESSMENT U/S.143(3)OF TH E ACT,ON30/01/2015,DETERMINING ITS INCOME AT RS.2,00,12,590/-.DURING THE COURSE OF HEARING BE FORE US,GROUNDS 2,4,5,6 AND 8 WERE NOT PRESSED. HENCE, SAME STANDS DISMISSED,AS NOT PRESSE D. 2. EFFECTIVE GROUND OF APPEAL (GS.OA-3,5 AND 7) IS ABO UT DISALLOWANCE MADE BY THE AO U/S. 14A OF THE ACT,AMOUNTING TO RS. 41.68 LAKHS DURING THE ASSESSMENT PROCEEDINGS, THE AO FOUND THAT THE ASSESSEE HAD RECEIVED DIVIDEND INCOME OF RS. 9. 21 LAKHS AND LONG-TERM CAPITAL GAIN OF RS. 19.44 LAKHS,THAT IT HAD CLAIMED EXEMPTION U/S. 10 ( 34) AND 10 (38) RESPECTIVELY. HE APPLIED PROVISIONS OF SECTION 14A READ WITH RULE 8D (II) OF THE INCOME TAX RULES, 1962 (RULES) AND DISALLOWED RS.38.78 LAKHS UNDER THE HEAD INTEREST E XPENDITURE AND 0.5% OF AVERAGE VALUE OF INVESTMENT AT RS. 1.78 LAKHS. 3 .AGGRIEVED BY THE ORDER OF THE AO, THE ASSESSEE PRE FERRED AN APPEAL BEFORE THE FIRST APPELLATE AUTHORITY (FAA).BEFORE HIM,IT WAS ARGUED THAT ASSES SEE HAD DEBITED INTEREST EXPENDITURE OF RS. 65.99 LAKHS,THAT IT HAD PAID INTEREST OF RS. 4.34 L AKHS ON THE LOAN AMOUNT TO THE MOTHER OF THE 4156/M/15-(12-13) M/S. SYNTHOLAB CHEMICALS & RESEARCH 2 PARTNERS WHO HAD KEPT HER FUNDS WITH THE FIRM FOR M ORE THAN 10 YEARS, THAT INTEREST WAS BEING CREDITED TO HER ACCOUNT FOR LAST FOR MANY YEARS, TH AT SHE HAD NOT BROUGHT IN ANY FUNDS AFTER 01/04/ 2006,THAT NO FRESH LOANS WERE RECEIVED BY THE ASSES SEE, MOTHER OF THE PARTNERS DURING THE YEAR UNDER CONSIDERATION, THAT NO PRESUMPTION COULD BE R AISED THAT THE SAID LOAN AMOUNT WAS UTILISED BY THE ASSESSEE FOR MAKING INVESTMENT THAT WOULD GE NERATE EXEMPT INCOME, THAT IT HAD PAID INTEREST TO THE PARTNERS AGGREGATING TO RS.64.95 LA KHS ON THEIR CAPITAL AT THE RATE OF 12% WAS PROVIDED IN THE PARTNERSHIP DEED, THAT AGAINST THE TOTAL EXPENDITURE OF RS.69.30 LAKHS THE ASSESSEE HAD RECEIVED INTEREST ON FIXED DEPOSITS OF RS.3.30 LAKHS, THAT THE MAT INTEREST EXPENDITURE OF RS.65.99 LAKHS WAS DEBITED TO THE PROFIT AND LOSS A CCOUNT, THAT THE INTEREST PAID BY THE FIRM TO THE PARTNERS WAS TAXED IN THE HANDS OF THE PARTNERS U/S . 28 (V) UNDER THE HEAD BUSINESS INCOME AND NOT INCOME FROM OTHER SOURCES, THAT THE PAYMENT OF INTEREST TO THE PARTNERS WAS NOT INTEREST EXPENDITURE, THAT IT WAS ONE WAY OF DISTRIBUTING PR OFITS OF THE BUSINESS OF THE FIRM, THAT IT COULD NOT BE TREATED AS INTEREST EXPENDITURE TO WHICH PRO VISIONS OF SECTION 14A COULD BE INVOKED. THE ASSESSEE RELIED UPON THE CASES OF SUDHIR KAPADIA (I TA/7888/MUMBAI/2003, DATED 26/02/2007), SUDHIR DATTARAM PATHE(2SOT678),BHARAT S RAUT(ITA/92 12/MUMBAI/2004, DATED 25/06/2008) BIHARI LAL AGGARWAL (ITA/1816/KOL/2009, DATED 07/01 /2011). IT ALSO REFERRED TO THE CASE OF RM CHIDAMBARAM PILLAI (106 ITR 292) AND FURTHER ARGUED THAT IT HAD INTEREST-FREE FUNDS IN FORM OF CAPITAL OF THE PARTNERS, AMOUNTING TO RS.7.02 CRORE S, THAT THE INVESTMENT IN SHARES WAS MADE OUT OF THE INTEREST REFUNDS, THAT NO EXPENDITURE WAS IN CURRED TO MAKE INVESTMENT IN THE SHARES, THAT NO THE EXPENDITURE WAS INCURRED FOR MAKING INVESTMENT IN SHARES, THAT NO EXPENDITURE WAS DEBITED TO THE PROFIT AND LOSS ACCOUNT IN RESPECT OF INVESTMEN T IN THE SHARES, THAT DISALLOWANCE MADE BY THE AO UNDER RULE 8D (2) (III), BEING 0.5% OF THE AVERA GE VALUE OF THE INVESTMENT, AMOUNTING TWO RS. 1.97 LAKHS SHOULD NOT HAVE BEEN MADE. AFTER CONSIDERING THE SUBMISSION OF THE ASSESSEE AN D THE ASSESSMENT ORDER, THE FAA HELD THAT THE PARTNERS CAPITAL WAS OF RUBY 702.53 LAKHS UNSECURED LOAN OF 40.04 LAKHS AND INVESTMENT IN SHARES WAS FOR 56.09 LAKHS,THAT DURING THE YEAR UND ER CONSIDERATION THERE WAS AN INCREASE IN INVESTMENT BY ABOUT RS. 125 LAKHS,THAT SOURCES OF A LL FUNDS INVESTED IN SHARES WAS EITHER PARTNERS CAPITAL OR UNSECURED LOAN OR THE BORROWING FROM THE BANKS, THAT INTEREST WAS PAID TO PARTNERS ON THEIR CAPITAL ON THE UNSECURED LOANS AND BORROWINGS FROM THE BANKS, THAT THE ASSESSEE DID NOT HAVE ANY INTEREST REFUNDS AVAILABLE FOR MAKING THE INVESTMENT IN SHARES, THAT THE ASSESSEE HAD NO 4156/M/15-(12-13) M/S. SYNTHOLAB CHEMICALS & RESEARCH 3 INTEREST FREE-FUNDS AVAILABLE FOR MAKING INVESTMENT S, THAT ALL THE FUNDS USED BY IT IN ITS BUSINESS, INCLUDING FUNDS USED IN MAKING THE INVESTMENT,WAS I NTEREST-BEARING FUNDS, THAT INTEREST EXPENDITURE WAS ATTRIBUTABLE TO THE INVESTMENT,INCL UDING THE INVESTMENT MADE DURING THE YEAR AND ALSO INVESTMENT MADE IN THE PAST. DISTINGUISHIN G THE CASES REFERRED BY THE ASSESSEE, THE FAA HELD THAT CASE UNDER CONSIDERATION WAS OF A FIRM AN D NOT OF THE PARTNERS, THAT THE ISSUE INVOLVED WAS AS TO WHETHER THE INTEREST EXPENDITURE INCURRED BY THE FIRM ON THE BORROWED FUNDS, INCLUDING THE PARTNERS INTEREST-BEARING CAPITAL UTILISED FOR MAKING INVESTMENT, WOULD BE ALLOWABLE AS DEDUCTION IN VIEW OF THE PROVISIONS OF SECTION 14A OF THE ACT, THAT IN THE CASES RELIED UPON BY THE ASSESSEE FOR ABOUT RELIABILITY OF INTEREST EXPENDIT URE INCURRED ON BORROWED FUNDS USED FOR MAKING CAPITAL CONTRIBUTION TO THE FIRM IN THE HANDS OF TH E PARTNERS WHO HAD RECEIVED SHARE OF THE PROFIT FROM THE FIRM AND ALSO REMUNERATION/SALARY FROM THE FIRM,THAT IN THOSE CASES THE TRIBUNAL HAD HELD THAT INTEREST EXPENDITURE INCURRED BY PARTNER ON FU NDS BORROWED FOR MAKING INVESTMENT IN THE FIRM AS CAPITAL WAS ALLOWABLE AS DEDUCTION AGAINST SALARY/REMUNERATION AND INTEREST RECEIVED FROM THE PARTNERSHIP FIRM, THAT THE DEDUCTION OF INTERES T WAS NOT ALLOWABLE AGAINST THE SHARE OF PROFIT, THAT IN THE CASE UNDER CONSIDERATION THE PARTNERS A CCOUNT HAD INTEREST-BEARING CREDIT BALANCES, THAT THE ASSESSEE HAD EARNED EXEMPT INCOME FROM SUCH INV ESTMENTS,THAT PARTLY EXEMPT INCOME WAS ARISING OUT OF THE INTEREST-BEARING FUNDS,THAT THE TRIBUNAL HAD NOT DELIBERATED UPON THE APPLICABILITY OF SECTION 14A OF THE ACT TO INVESTME NTS MADE BY A FIRM.FINALLY,THE FAA UPHELD THE DISALLOWANCE MADE BY THE AO. 4. DURING THE COURSE OF HEARING BEFORE US, THE AUTHORI SED REPRESENTATIVE ARGUED THAT INTEREST PAID TO THE PARTNERS BY THE PARTNERSHIP FIRM WAS NOT AN EXPENDITURE, THAT REMAINED OF INTEREST TO THEM WAS DISTRIBUTION OF PROFITS AS PER THE PROVISIONS O F SECTION 40 (B) OF THE ACT THAT ASSESSEE HAD SUFFICIENT FUNDS TO MAKE INVESTMENTS, THAT THE INVE STMENT MADE BY THE ASSESSEE DURING THE YEAR WAS LESS THAN THE PROFITS MADE. HE RELIED UPON THE CASE OF QUALITY INDUSTRIES (ITA/2000/PN/2014 -AY.2010-11,DATED 09/09/2016) AND PAHLAJRAI JAIKISH IN(ITA/6870/MUM/2012,AY.2009-10,DATED 11/03/2015).THE DEPARTMENTAL REPRESENTATIVE CONTEND ED THAT ASSESSEE HAD UTILISED BORROWED FUNDS,THAT THE FIRM AND PARTNERS WERE SEPARATE ENTI TIES, THAT THE INTEREST EXPENDITURE WAS INCURRED BY THE ASSESSEE,THAT THE PROVISIONS OF SECTION 14A WERE APPLICABLE. 4156/M/15-(12-13) M/S. SYNTHOLAB CHEMICALS & RESEARCH 4 5. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE MATERIAL BEFORE US. WE FIND THAT THE BASIC ISSUE TO BE DECIDED IS ABOUT THE INTEREST PAYMENT M ADE BY THE PARTNERSHIP FIRM TO THE PARTNERS IN LIGHT OF THE PROVISIONS OF SECTION 14A READ WITH RU LE 8D OF THE RULES.IT IS FOUND THAT THE TRIBUNAL HAS DEALT THE ISSUE,IN DETAIL,IN THE CASE OF QUALIT Y INDUSTRIES (SUPRA). WE WOULD LIKE TO REPRODUCE THE RELEVANT PORTION OF THE ORDER OF THE TRIBUNAL A ND IT READS AS UNDER: 10. WE HAVE CAREFULLY CONSIDERED THE RIVAL SUBMISSI ONS. THE PRE-DOMINANT QUESTION THAT ARISES FOR OUR CONSIDERATION IS WHETHER PAYMENT OF INTEREST TO THE PARTNERS BY THE PARTNERSHIP FIRM TOWARD USE OF PARTNERS CAPITAL IS IN THE NATURE OF EXPEN DITURE OR NOT FOR THE PURPOSES OF SECTION 14A OF THE ACT AND CONSEQUENTLY, WHETHER INTEREST ON PARTN ERS CAPITAL IS AMENABLE TO SECTION 14A OR NOT IN THE HANDS OF PARTNERSHIP FIRM. 11. IN ORDER TO ADJUDICATE THIS LEGAL ISSUE, WE NEE D TO APPRECIATE THE NUANCES OF THE SCHEME OF THE TAXATION. WE NOTE THAT PRIOR TO AMENDMENT OF TAXATI ON 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 P ARTNERS. AN AMENDMENT WAS INTER ALIA BROUGHT IN BY THE FINANCE ACT 1992 IN SECTION 40(B) TO ENAB LE THE FIRM TO CLAIM DEDUCTION OF INTEREST OUTGO PAYABLE TO PARTNERS ON THEIR RESPECTIVE CAPITAL SUB JECT 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 DEDUC TION AVAILABLE UNDER S. 40(B) OF THE ACT. 11.1 OSTENSIBLY, WITH EFFECT FROM AY. 1993-94, PART NERSHIP FIRMS COMPLYING WITH THE STATUTORY REQUIREMENTS AND ASSESSED AS SUCH ARE ALLOWED DEDUC TION IN RESPECT OF INTEREST TO PARTNERS SUBJECT TO THE LIMITS AND CONDITIONS SPECIFIED IN S ECTION 40(B) OF THE ACT. IN TURN, THESE ITEMS WILL BE TAXED IN THE HANDS OF THE PARTNERS AS BUSINESS I NCOME UNDER S. 28(V). SHARE OF PARTNERS IN THE INCOME OF THE FIRM IS EXEMPT FROM TAX U/S. 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 RE CEIVED 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 RE CEIVED BY A PARTNER OF THE 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 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 O NLY U/S. 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 1 932. THE AMENDMENT TO SECTION 40(B) AS REFERRED HEREINABOVE HAS ONLY ALTERED THE MODE OF T AXATION. NEEDLESS TO SAY, THE PARTNERSHIP FIRM IS NOT A SEPARATE LEGAL ENTITY UNDER THE PARTNERSHI P ACT. IT IS NOT WITHIN THE PURVIEW OF THE INCOME-TAX ACT TO CHANGE OR ALTER THE BASIC LAW GOV ERNING PARTNERSHIP. INTEREST OR SALARY PAID TO PARTNERS REMAINS DISTRIBUTION OF BUSINESS INCOME. 11.3 RELEVANT HERE TO REFER TO DECISION OF HONBLE SUPREME COURT IN THE CASE OF CIT VS. R.M. CHIMBARAM PILLAI (1977) 106 ITR 292(SC) 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 IN COME-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 EMPLOYEER AND THE EMPLOYEE, THER E 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 TH E 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, 4156/M/15-(12-13) M/S. SYNTHOLAB CHEMICALS & RESEARCH 5 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 T AX ONLY TO THE EXTENT OF 40 PER CENT.' SUPREME COURT HAS ALSO HELD IN THE CASE OF CIT VS. RAMNIKLA L 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 I NCOME AND, THEREFORE, EXPENSES INCURRED BY THE PARTNERS FOR THE PURPOSE OF EARNING THIS INCOME FRO M 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 BET WEEN THE TWO WAS BLURRED IN THE JUDICIAL PRECEDENTS EVEN FOR TAXATION PURPOSES. 11.4 SECTION 4 OF THE INDIAN PARTNERSHIP ACT 1932 D EFINES THE TERMS PARTNERSHIP, PARTNER, FIRM AND FIRM NAME AS UNDER : PARTNERSHIP' IS THE RELAT ION 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 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 T HE FIRM ARE NOT SEPARATE PERSON UNDER PARTNERSHIP ACT ALTHOUGH SEPARATE UNIT OF ASSESSMEN T 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)(I II) IS NOT APPLICABLE AT ALL. SECTION 40(B) IS THE ONLY SECTION GOVERNING DEDUCTION TOWARDS INTEREST T O PARTNERS. IN THE LIGHT OF WHAT IS ALREADY NOTED ABOVE THAT FIRM AND PARTNERS NOT BEING TWO SE PARATE PERSONS, THE QUESTION OF BORROWING CAPITAL BY THE FIRM FROM ITS PARTNERS DOES NOT ARIS E AT ALL AND, THEREFORE, SECTION 36(1)(III) IS NOT AT ALL APPLICABLE FOR THE PURPOSES OF COMPUTATION OF I NTEREST TO PARTNERS U/S. 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 U/S. 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 IN TEREST PAID BY THE FIRM AND CLAIMED AS DEDUCTION IS SIMULTANEOUSLY SUSCEPTIBLE TO TAX IN THE HANDS O F ITS RESPECTIVE PARTNERS IN THE SAME MANNER. IN THE SAME VAIN, THE FIRM IS MERELY A COMPENDIUM OF I TS 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 HAND S 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 PA YABLE TO OUTSIDE PARTIES. THUS, IN SUBSTANCE, THE REVENUE IS NOT ADVERSELY AFFECTED AT ALL BY THE CLA IM 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 A NY LOSS IN REVENUE BY THIS ACTION OF THE ASSESSEE. IN VIEW OF THE INHERENT MUTUALITY, WHEN T HE PARTNERSHIP FIRM AND ITS PARTNERS ARE SEEN HOLISTICALLY AND IN A COMBINED MANNER WITH COSTS TO WARDS INTEREST ELIMINATED IN CONTRA, THE INVESTMENT IN MUTUAL FUNDS GENERATING TAX FREE INCO ME BEARS THE CHARACTERISTIC OF AND ATTRIBUTABLE TO ITS OWN CAPITAL WHERE NO DISALLOWANCE UNDER S. 1 4A READ WITH RULE 8D IS WARRANTED. CONSEQUENTLY, THE PLEA OF THE ASSESSEE IS MERITED I N 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. SIMILARL Y, 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. 4156/M/15-(12-13) M/S. SYNTHOLAB CHEMICALS & RESEARCH 6 RESPECTFULLY FOLLOWING THE ABOVE ORDER OF THE TRIBU NAL,WE HOLD THAT INTEREST EXPENDITURE INCURRED BY THE PARTNERSHIP FIRM ON ACCOUNT OF INTEREST PAID TO THE PARTNERS CANNOT BE DISALLOWED UNDER PROVISIONS OF SECTION 14A OF THE ACT.GS.OA NO.3 AND 5 ARE DECIDED IN FAVOUR OF THE ASSESSEE 5.1. IT IS FOUND THAT THE ASSESSEE HAD MADE INVESTMENT I N REAL ESTATE FUNDS AND GUILT FUNDS. INCOME ARISING FROM SUCH INVESTMENTS COULD BE TAXABLE. HEN CE SAME SHOULD NOT HAVE BEEN CONSIDERED FOR COMPUTING THE DISALLOWANCE U/S. 14A.WE FIND THAT AO /FAA HAS NOT MADE PROPER INVESTIGATION IN THAT MATTER.THEREFORE, IN THE INTEREST OF JUSTICE, WE ARE RESTORING THAT THE ISSUE TO THE FILE OF THE AO FOR FRESH ADJUDICATION.HE IS DIRECTED TO AFFORD A REASONABLE OPPORTUNITY OF HEARING TO THE ASSESSEE.THE ASSESSEE-FIRM WOULD PRODUCE THE DOCUME NTS RELATED TO TAXABLE GENERATING FUNDS. GROUND NUMBER SEVEN IS DECIDED IN FAVOUR OF THE ASS ESSEE, IN PART. AS A RESULT, APPEAL FILED BY THE ASSESSEE STANDS PA RTLY ALLOWED. . ORDER PRONOUNCED IN THE OPEN COURT ON 19 TH APRIL, 2017. 19 , 2017 SD/- SD/- ( / RAM LAL NEGI ) ( / RAJENDRA ) / JUDICIAL MEMBER / ACCOUNTANT MEMBER MUMBAI; /DATED : 19.04 .2017. JV.SR.PS. / COPY OF THE ORDER FORWARDED TO : 1. APPELLANT / 2. RESPONDENT / 3. THE CONCERNED CIT(A)/ , 4. THE CONCERNED CIT / 5. DR A BENCH, ITAT, MUMBAI / , , . . . 6. GUARD FILE/ //TRUE COPY// / BY ORDER, / DY./ASST. REGISTRAR , /ITAT, MUMBAI.