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Income Tax Appellate Tribunal, ‘’C’ BENCH, AHMEDABAD
Before: SHRI MAHAVIR PRASAD & SHRI WASEEM AHMED
आदेश/O R D E R PER WASEEM AHMED, ACCOUNTANT MEMBER: The Assessee files the captioned appeal against the order of the Learned Commissioner of Income Tax (Appeals)-1 Ahmedabad, [Ld.CIT(A) in short] vide appeal no.CIT(A)-VI/DCIT, Cir-1/132/2013-14 dated 08/04/2015, arising in the matter of assessment order passed u/s 143(3) of the Income Tax Act, 1961 (here-in-after referred to as ‘’the Act’’) for the Assessment Year 2010-2011. The Assessee has filed Cross Objection No.
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201/Ahd/2015 in ITA bearing no. 2730/Ahd/2015 for the Assessment Year 2011-2012.
First, we take up ITA No.1653/Ahd/2015 for A.Y 2010-11. The assessee has raised following grounds of appeal: 1. In law and in the facts and circumstances of the appellant's case, the learned CIT(A) has grossly erred in dismissing Ground No. 1 of the appellant's appeal challenging the very validity of the assessment order impugned before him. 2. In law and in the facts and circumstances of the appellant's case, the learned CIT(A) has grossly erred in failing to appreciate that it was not at all open to the learned Assessing Officer to invoke Section 14A of the Income-tax Act, 1961 on the ground that the appellant must have incurred expenditure in relation to its share income from a partnership firm. 3. Without prejudice to Ground No. 2 above, in law and in the facts and circumstances of the appellant's case, the learned CIT(A) has grossly erred in 'sustaining' disallowance out of interest expenditure to the extent of Rs.5.60.942 under Rule 8D(2)(i) [as against Rs. 16.53,014 disallowed by the Assessing Officer under Rule 8D(2)(ii)]. 4. In law and in the facts and circumstances of the appellant's case, the learned CIT(A) has grossly erred in sustaining disallowance of Rs. 1.34.909 out of administrative expenditure made by the learned Assessing Officer u s. 14A read with Rule 8D(2)(iii). 5. In law and in the facts and circumstances of the appellant's case, the learned CIT(A) has grossly erred in sustaining disallowance of deduction for Rs.6.27.066 which the appellant had claimed u/s. 35D. 6. In law and in the facts and circumstances of the appellant's case, the learned CIT(A) has grossly erred in sustaining addition of Rs.40.354 out of total such addition of Rs.2.19.204 made by the learned Assessing Officer u/s. 41(1) on the ground that the appellant's dues to certain creditors having remained outstanding for a period of over three years, must be assumed to have ceased to be a liability. 7. In law and in the facts and circumstances of the appellant's case, the learned CIT(A) has grossly erred in dismissing Ground No. 5 of the
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appellant's appeal before him challenging the initiation of penalty proceedings u/s. 271(l)(c), as premature. 8. The appellant craves leave to add, amend and/or alter the ground or grounds of appeal either before or at the time of hearing of the appeal.3.
At the outset, the Ld. AR, for the assessee submitted that he has been instructed by the assessee not to press ground no. 5 and 6 due to the smallness of amount. Therefore, we dismiss both the grounds of appeal of the assessee as not pressed.
The ground no. 7 relates to the initiation of penalty proceedings u/s 271(1)(c) of the Act which in our considered view is premature at this stage. Therefore, we dismiss the same.
The ground no. 1 and 8 raised by the assessee are general in nature which needs no separate adjudication. Accordingly, we dismiss the same.
The only issue raised by the assessee is that Ld.CIT(A) erred in confirming the disallowance of Rs. 6,95,851/- out of total disallowance made by the AO for Rs. 17,87,923/-
Briefly stated facts are that the assessee is a limited Company engaged and engage in the business of cold storages etc. The assessee is a partner in a firm namely Vishakha Industries wherein the assessee has invested Rs. 5,39,63,625/- only. The assessee during the year received its share of profits for Rs. 17,43,625/- which was claimed as exempted u/s 10(2A) of the Act. The assessee against such exempt income has not made any disallowance of
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the expenses in pursuance to the provision of section 14A r.w.r 8D of Income Tax Rule.
However, the AO was of the view that the assessee has declared exempt income; therefore the disallowances of the expenses need to be made as per the provision of section 14A r.w.r 8D of Income Tax Rule. Accordingly, the AO made the following disallowances:
Sr.No. Particular Amount in Rs. 1. Direct Expenses Nil 2. Interest Expenses under Rule 8D(ii) 16,53,014/- 3. Administrative Expenses under Rule 8D(iii) 53,014/- Total Rs.17,87,923/-
The above expenses were disallowed and added to the total income of the assessee.
Aggrieved assessee preferred an appeal to the Ld.CIT(A). The assessee before the Ld.CIT (A) submitted that the amount of share of profit received by it from the partnership firm has already suffered tax in the hand of the firm, therefore no disallowance u/s 14A r.w.r 8D is warranted.
9.1 The assessee also submitted that the investment of Rs. 5,39,63,625/- was made out of its funds of Rs. 102,57,10,000/- as on 31/03/2010.
9.2 Regarding the administrative expenses the assessee submitted that the AO had made the disallowance on the estimated basis which is not permissible under the provision of section 14A of the Act.
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However, Ld. CIT(A) after considering the contentions of the assessee observed that the assessee made the investment out of its fund. Therefore the ld. CIT-A deleted the addition of the interest expenses made by the AO.
10.1 The Ld.CIT (A) further observed that the assessee during the year has purchased goods from such partnership firm valuing Rs. 24,87,708/- only. At the same time the assessee has paid interest to the partnership firm for Rs.11,21,884/- which was charged by the firm on account of delayed payment.
10.2 The Ld.CIT(A) accordingly found that the assessee on one hand has claimed interest expenses and on the other hand has shown income from the firm as share of profit amounting to Rs.17,35,415/-. Therefore the Ld. CIT(A) was of the view that there is a direct nexus between interest expenses and the share of profit received by it. Therefore such interest expense being directly connected with the share of profit, requires to be disallowed to the tune of 50% in proportion to the share of profit of the assessee as direct expenses under rule 8D(2)(i) of Income Tax Rule. The share of profit of the assessee represent 50% of the total income of the firm, therefore 50% of the interest expenses (Rs. 5,60,942.00) claimed by the assessee should be disallowed under Rule 8D(2)(i) of Income Tax Rule.
10.3 The Ld.CIT (A) regarding disallowance of administrative expenses under Rule 8D (iii) of the Income Tax Rule confirmed the action of AO.
In the view of the above the Ld.CIT(A) made the addition and deletion against the exempted income as detailed under:
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Sr.No. Particular Amount in Rs. Remarks 1. Direct expense under Rule 506942 Amount 8D(i) enhanced by the Ld.CIT(A) 2. Interest expenses under Rule Nil 8D (ii) 3. Administrative Expenses 134909 Confirmed the under Rule 8D (iii) order of the AO
10.4 Thus, the ground of appeal of the assessee was partly allowed.
Being aggrieved by the order of Ld.CIT (A) assessee is in appeal before us.
The Ld.AR, before us, filed a paper book running from pages 1 to 78 and submitted that the interest received by the assessee for Rs. 17,35,415/- is taxable under the head ‘’business and profession’’. Therefore the question of making any disallowance under the provision of section 14A r.w.r 8D does not arise.
On the other hand Ld. DR, before us, apprehended that the amount received by the assessee from the firm may represent the share of profit which is exempted from tax. Therefore the provision of section 14A r.w Rule 8D is directly applicable.
13.1 The Ld. DR, further submitted that the facts of the present case are not very clear; therefore the matter can be set aside to the file of AO for fresh adjudication.
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We have heard the rival contentions and perused the material available on record. On perusal of statement of income filed by the assessee which is placed at page 2 of the paper book, we note that the amount received by the assessee for Rs.17,83,625/- represent the share of profit from the firm. Therefore we reject the argument of the Ld. AR, that the amount received from the firm is interest income and the same was offered to tax. The relevant extract of the statement of income is reproduced as under:
COMPUTATION OF INCOME Rs. Rs. Rs. PROFIT & GAINS OF (-)228929477 BUSINESS OR PROFESSION Net Loss As per P/L Account (Before taxation) Add: Disallowable/Additions Depreciation Penalty 94389144 ROC fees for increasing 20000 Authorised Cap. 2948050 Unpaid bonus Donation 233100 Provision for doubtful debts 400000 Unpaid Leave encashment 20365662 Unpaid ex-gratia payment 609354 939087 Less: Income considered 1198043976 separately Profit on sale of fixed assets 107083 Share of profit from partnership firm (-)1850708 1743625 Less: Deduction/Expenses claimed Prelimery Exps. w/off (3rd 627066 year)
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P.Y. Unpaid Bouns paid in 448000 C.Y P.Y. Unpaid Leave 23021 encashment paid in C.Y P.y Ex-gratia in C.Y. 1052935 Depreciation as per 155229320 Statement (-)157380342 (-)268356130
14.1 Admittedly the share of profit from the firm is exempt u/s 10(2A) of the Act. Now, the question arises whether disallowances needs to be made u/s 14A r.w.r. 8D against the share of profit from the partnership firm. We find that the Co-ordinate Bench in identical facts and circumstances in the case of Shri Vishnu Anant Mahajan Vs. ACIT reported in 137 ITD 189 has taken the following view. “7. We have given careful consideration to various cases relied upon by the contesting parties. These cases inter-alia show that a firm can validly enter into an agreement with a partner regarding purchase and sale of assets etc.[Kaluram Puranmal; Chase Trading Co.]. Further it has been held that whenever the field is occupied by the tax law, the provision contained therein will become applicable, but where the field is left vacant, we will have to take assistance from the provisions contained in the Partnership Act for filling the vacuum under the tax law. [K. Kulakutty]. In so far as the issue before us is concerned, a firm and its partners are assessable separately on their total income in their names, notwithstanding the position of law under the Partnership Act that a firm is a compendium or the collective name of the partners. Thus, in so far as the taxation is concerned, the firm is not a pass-through vehicle. It is a translucent vehicle, as only the salary and interest paid to the partners are taxable under Section 28(v) as business income. It has been so provided because there cannot be really be a relationship of employer and employee or debtor or creditor between the firm on one hand and the partners on the other hand. Even earlier, the salary and interest allocated to the partners were taxable as business income. The real change in the scheme of taxation is that the firm is taxed at a flat rate of income after deduction of interest and salary paid to the partners, and interest and salary are taxed in the hands of the partners as business income. Thus, it is clear that the amount taxed in the hands of the firm is not taxed again in the hands of the partners. This change has led to avoidance of double taxation because the firm does not have to pay tax on salary and interest income paid to the partners and the partners do not have to pay tax on share income allocated to them. This is achieved by insertion of section 10(2A) and 28(v) in the Act. In so far as share income is concerned, the field is occupied by the tax law, as it is enacted that the share income shall not form part of
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total income of the partners. Therefore, in view of this specific provision and the fact that the firm and partners are separately assessable entities, it will be difficult to hold that the share income is not excluded from the total income of the partner because the firm has already been taxed thereon. When section 10(2A) speaks of its exclusion from the total income, it means, the total income of the person whose case is under consideration. The instant case is that of the partner and therefore what is to be examined is whether the share income is excluded from his total income. The answer is obviously in the affirmative. In such a situation, provision contained in section 14A will come into operation and any expenditure incurred in earning the share income will have to be disallowed. Thus, we agree with the learned CIT(A) that the provision contained in section 14A is applicable to the facts of the case. Further, it has been held in the case of Godrej & Boyce Mfg. Co. Ltd. (supra) that all facts may be taken into consideration for determining the quantum of disallowance to be made. This portion of the judgment is applicable only in respect of determination of quantum of disallowance. The learned CIT(A) has disallowed the expenditure in the ratio of income not included in the total income and the income received from the firm. In the absence of any argument regarding any error in this part of the decision, it is held that he was right in doing so.”
In view of the above, we are of the view that the provisions of section 14A r.w.r. 8D of Income Tax rule are very much applicable for the income earned by the assessee as a share of profit being exempted income u/s 10(2A) of the Act.
Regarding the disallowance of the direct expense of Rs.5,06,942/- we note that there was no connection between the interest expenses incurred by the assessee for the delayed payment to the firm and share of profit received from the firm. These are two independent transactions, and therefore the same should be viewed in the context of the relevant provisions of the law. Therefore we hold that the same (interest expense) cannot be treated as direct expenses under rule 8D(2)(i) of the Rule. Therefore we reverse the order of the ld. CIT-A and direct the AO not to disallow the same under rule 8D(2)(i) of the Rule.
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Regarding the administrative expenses under rule 8D(2)(i) of the Rule, we note that the ld. AR did not advance any agreement on this issue. Therefore we concur with the view of the ld. CIT-A. Therefore we confirm the same.
Hence the ground of appeal of the assessee is partly allowed.
Now coming to the C.O No.201/Ah/3025 ( in ITA No.2730/Ahd/2015) for Assessment Year 2011-12. The assessee has raised following grounds of Cross Objections:
In law and in the facts and circumstances of the respondent's case, the learned CIT(A) has grossly erred in not adjudicating upon Ground No. 1 of the respondent's appeal challenging the validity of the assessment order impugned before him, on the ground that it was general in nature. 2.1 In law and in the facts and circumstances of the respondent's case, the learned CIT(A) has grossly erred in sustaining disallowance of administrative expenses amounting to Rs.3,34,096 made by the learned Assessing Officer under Section 14A read with Rule 8D. He ought to have appreciated, inter alia, that in the peculiar facts and circumstances of the case, the respondent's claim that it had not incurred any expenditure in relation to exempt income was correct and, therefore, the impugned disallowance deserved to be deleted. 2.2 Without prejudice to the above, in law and in the facts and circumstances of the respondent's case, the learned CIT(A) has grossly erred in sustaining the impugned disallowance without considering Ground No. 2.2 of the respondent's appeal before him reading as under: "2.2 Without prejudice to the foregoing, in law and in the facts and circumstances of the appellant's case, the learned Assessing Officer has grossly erred in arriving at the quantum of the disallowance for administrative expenditure Rs.3,34,096 without considering Deferred Tax Assets while arriving at the average value of total assets (to be used in the denominator of the formula prescribed in Rule 8D)."
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In law and in the facts and circumstances of the respondent's case, the learned CIT(A) has grossly erred in upholding the disallowance of the respondent's claim for deduction for preliminary expenses of Rs.6,27,066 u/s. 35D after following his predecessors upholding similar disallowances in earlier assessment years. He ought to have appreciated, inter alia, that the decisions of the Supreme Court in Brooke Bond India Limited (225 ITR 798 and of the Gujarat High Court in Vareli Textiles Limited (284 ITR 238) holding that share issue expenses were capital in nature and, therefore, not deductible as revenue expenses as claimed by the assesses in those cases, were not relevant on the issue of their deductibility u/s. 35D (which made provision for deduction of expenses on amortization basis even if they be capital in nature) which was required to be decided in the respondent's present case and that the decision of the Rajasthan High Court in CIT v. Multi Metals Ltd. (188 ITR 151) on which the respondent had relied was directly on the issue and in favour of the assessee. He ought, accordingly, to have ordered for the deletion of the disallowance following the said decision of the Rajasthan High Court. 4. In law and in the facts and circumstances of the respondent's case, the learned CIT(A) has grossly erred in dismissing Ground No. 7 of the respondent s appeal before him challenging levy of interest u/ss. 234A, 234B, 234C and 234D after observing that levy of interest under those Sections was consequential in nature. He ought to have appreciated, inter alia, that the respondent had challenged the very levy of interest and that since in the peculiar facts and circumstances of its case the ratio of the decision of the Gujarat High Court in Bharat Machinery and Hardware Mart's case (136 ITR 875) and of the decision of the ITAT, Delhi Bench in Haryana Warehousing Corporation v. DCIT [252 ITR (AT.) 34] was attracted, the levy deserved to be cancelled. 5. In law and in the facts and circumstances of the respondent's case, the learned CIT(A) has grossly erred in dismissing Ground No. 8 of the respondent's appeal before him challenging the initiation of penalty proceedings u/s. 271(1)(c), as premature. He ought to have appreciated, inter alia, that in the peculiar facts and circumstances of the respondent's case, there being absolutely no warrant/justification for initiating the penalty proceedings, he ought to have ordered for their being dropped, thereby saving both the appellant and the Department from long drawn unnecessary litigation. 6. The respondent craves leave to add, amend and/or alter the ground or grounds of Cross-objections either before or at the time of hearing.
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At the outset, we find that the grounds raised in the Cross Objections are identical to the facts of the case in the appeal by the assessee in ITA No.1653/Ahd/2015 for AY 2010-2011, which we have partly allowed the appeal of the assessee. Therefore, respectfully following the same the grounds raised by the assessee in its Cross Objection are partly allowed. Hence, the grounds raised in the Cross Objections by the assessee are partly allowed.
In the result the appeal and the Cross Objection of the assessee are partly allowed.
Order pronounced in the Court on 19/03/2019 at Ahmedabad.
-Sd- -Sd- (WASEEM AHMED) (MAHAVIR PRASAD) JUDICIAL MEMBER ACCOUNTANT MEMBER (True Copy) Ahmedabad; Dated 19/03/2019 manish आदेश क� ��त�ल�प �े�षत/Copy of the Order forwarded to : 1. अपीलाथ� / The Appellant 2. ��यथ� / The Respondent. 3. संबं�धत आयकर आयु�त / Concerned CIT 4. आयकर आयु�त(अपील) / The CIT(A) 5. �वभागीय ��त�न�ध, आयकर अपील�य अ�धकरण / DR, ITAT, 6. गाड� फाईल / Guard file. आदेशानुसार/BY ORDER, उप/सहायक पंजीकार (Dy./Asstt.Registrar) आयकर अपील�य अ�धकरण, अहमदाबाद / ITAT, Ahmedabad