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Facts
The assessee, engaged in real estate development, had investments in partnership firms and subsidiaries. They earned exempt income from dividends and share of profits from partnership firms. The Assessing Officer (AO) made a disallowance under Section 14A by including investments in partnership firms, which the assessee had initially excluded in its suo motu disallowance.
Held
The Tribunal held that share of profit from partnership firms is exempt income and therefore, investments in such firms should be included for calculating disallowance under Section 14A read with Rule 8D(2)(iii). The disallowance was re-calculated considering only those investments that yielded exempt income.
Key Issues
Whether investments in partnership firms yielding exempt income should be included for disallowance under Section 14A read with Rule 8D(2)(iii)?
Sections Cited
14A, 143(3), 10(2A)
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Income Tax Appellate Tribunal, “D” BENCH MUMBAI
Before: SHRI SAKTIJIT DEY, HONBLE & SHRI GIRISH AGRAWAL
PER GIRISH AGRAWAL, ACCOUNTANT MEMBER:
1. This appeal filed by the Assessee is against the order of Ld. CIT(A), National Faceless Appeal Centre (NFAC), Delhi, vide order no. ITBA/NFAC/S/250/2024-25/1069255816(1), dated 30.09.2024, passed against the assessment order by Assistant Commissioner of Income-tax-1(1)(1), Mumbai, u/s. 143(3) of the Income-tax Act, 1961 (hereinafter referred to as the “Act”), dated 06.12.2016 for Assessment Year 2014-15.
2. Grounds taken by the Assessee are reproduced as under:
“1. On facts and circumstances of the case and in law, the order passed by Ld. CIT(A) ignoring the requests of personal hearing before passing the impugned appellate order in a violation of principles of natural justice as well as mandatory procedure prescribed in "Faceless Appeals Rules 2021," is an arbitrary order and is bad in law. The same needs to be quashed and the grounds of appeal needs to be allowed.
2. Addition uls. 14A r.w.r SD of Rs. 33,68,410/- a. On facts and circumstances of the case and in law, Ld. CIT(A) erred in confirming the excess disallowance of Rs. 33,68,410/-u/s, 14A of the Act made by the Ld AO without giving any reason for not being satisfied having regard to the books of accounts of the appellant with the correctness of the claim of the appellant. b. On facts and circumstances of the case and in law, Ld. CIT(A) erred in confirming the excess disallowance of Rs. 33,68,410/-u/s. 14A of the Act made by the Ld AO without appreciating and following the decision of Hon'ble Mumbai ITAT (ITA No. 2043/Mum/2022) dated 13.04.2023 in appellant's own case for AY 2016-17 wherein disallowance u/s. 14A as calculated by Ld AO was cancelled. The addition needs to be deleted.”
3. The sole issue raised by the assessee is in respect of disallowance of Rs.33,68,410/- made u/s.14A of the Act by applying Rule 8D(2)(iii). Ground no.1 raised in this appeal is not pressed by the assessee. Accordingly, the same is dismissed as not pressed. Facts as culled out from records are that assessee filed the return of income on 22.11.2014 reporting total income at Rs.20,27,42,800/-. Assessee is in the business of real estate development. Assessee has made investments in several partnership firms and LLPs. It also has several subsidiaries companies in which investment is made in their share capital. Assessee earned following exempt income:- i) Dividend – Rs.6,24,980/- ii) Share of profit from partnership firms – Rs.20,97,729/- 3.1. The above stated share from partnership firms is after setting off share of loss from certain other partnership firms. The details of profit/loss from different partnership firms in which assessee had made investments is tabulated below: Name of Firm/LLP Rs. i) Friends Development Corporation 56,71,988 ii) Dosti Enterprises (34,73,796) iii) Dosti Development Corporation (8,217) iv) Crystal Builders & Developers (97,187) v) Dosti Sea view LLP 4,942 Total 20,97,729 3.2. While computing total income, assessee made a suo moto disallowance of Rs.5,13,698/- u/s. 14A towards expenses in respect of exempt income earned during the year. The details of suo moto disallowance made by the assessee is by applying Rule 8D(2)(iii) of the Income Tax Rules, 1962 (The Rules) are tabulated below:
Sr. Investment As on As on Average No. 01.04.2013 31.03.2014 (Rs.) (Rs.) 1. Investment in 9,90,25,000 9,90,25,000 subsidiaries 2. Mutual Fund 25,00,000 25,00,000 investment 3. Warrant 12,14,516 12,14,516 application money Total 10,27,39,516 10,27,39,516 10,27,39,516 0.5% thereof 5,13,698 3.3. It is important to note that assessee has applied Rule 8D(2)(iii) for suo moto disallowance u/s.14A by excluding the investment made by it in partnership firms. The suo moto disallowance made by the assessee is not calculated based on expenses which have already been claimed as deduction while computing the income under the head ‘profits and gain from business or profession’ or under the head ‘income from other sources’ which forms part of its books of accounts. In this respect, according to the ld. Assessing Officer, investments made by the assessee in partnership firms ought to have been taken into consideration while computing the disallowance under Rule 8D(2)(iii). According to the ld. Assessing Officer, share of profit from partnership firms is an exempt income and therefore investments made by the assessee in such partnership firms need to be taken into account while applying Rule 8D(2)(iii). Thus, ld. Assessing Officer re-computed the disallowance in Rule 8D(2)(iii) by including the investments in partnership firms to arrive at a total disallowance of Rs.38,82,108/-. Since assessee had already made a suo moto disallowance of Rs.5,13,698/-, ld. Assessing Officer made further addition for the balance of Rs.33,68,411/-. The details of calculation made by the ld. Assessing Officer is tabulated below: PARTICULARS Amt. (Rs.) Remarks 1. Direct expenses attributable Nil 2. Interest claimed (A)* average Nil investments(B)/average of total assets (C) i.e. A*B/C 3 0.5% of the average investments 38,82,108/- (46,33,75,670 + 1,08,94,67,703)/2*5/100 Total 38,82,108/- 3.4. While re-computing the disallowance u/s.14A, ld. Assessing Officer recorded his observations in para-4 of the impugned assessment order to point out that assessee while calculating its suo moto disallowance under Rule 8D(2)(iii) has not considered all the investments. He recorded his dissatisfaction on the suo moto disallowance made by the assessee which is computed by applying Rule 8D(2)(iii). Thus, what emerges is that both assessee and ld. Assessing Officer have computed the disallowance u/s.14A by applying Rule 8D(2)(iii). The only difference in respective computation is the investments which have been included for the said computation. Assessee has excluded the investments made in partnership firms whereas the ld. Assessing Officer has included the same.
3.5. Contention of the assessee by raising ground no.2(a) that ld. Assessing Officer has made a disallowance without giving any reason for not being satisfied having regard to the books of accounts of the assessee in the correctness of the claim, is not tenable. As already stated, suo moto disallowance by the assessee is not calculated having regard to the books of accounts but is calculated by applying Rule 8D(2)(iii). Accordingly, the sole issue which remains before us for the adjudication is whether to include the investments made by the assessee in partnership firms for the purpose of calculation of disallowance under Rule 8D(2)(iii).
Before proceeding on this issue, it is worth mentioning that assessee has also placed reliance on the decision of the Coordinate Bench in assessee’s own case for Assessment Year 2016-17 in dated 13.04.2023 to claim that its case is squarely covered by the decision of the Coordinate Bench. From the perusal of the said order, from para-16, it is noted that the Coordinate Bench has observed that ld. Assessing Officer is supposed to point out mistake/deficiency in the working given by the assessee, only then he can substitute its own working with that, which is missing in the case.
In the light of these observations in the present case before us, we note that ld. Assessing Officer in the impugned order in para-4 has pointed out the mistake/deficiency in the working of the suo moto disallowance by the assessee by stating that all the investments have not been taken into consideration for calculating the disallowance to be line with Rule 8D(2)(iii). Further, we note that the Coordinate Bench did not have any occasion to deal with the decision of Hon'ble Special Bench, Ahmedabad in the case of Vishnu Anant Mahajan [2012] 22 taxmann.com 88 (Ahd)(SB). Hon'ble Special Bench held that share income of partner from partnership firm is not liable to tax u/s.10(2A) and in such a case, provisions of section 14A apply to disallow expenditure incurred on earning the said income. Decision of Special Bench carries force of binding nature. Accordingly, share of profit from partnership firms earned by the assessee, during the year, requires disallowance u/s.14A of the Act. Since assessee has calculated suo moto disallowance by applying Rule 8D(2)(iii) instead of computing the same by considering expenses having regard to the books of accounts, the investment made by it in partnership firms ought to be included while making calculation under Rule 8D(2(iii).
5.1. In the present set of facts, not all the investments made in various partnership firms have yielded share of profit. Thus, by applying the decision of another Hon'ble Special Bench in the case of Vireet Investment [2017] 82 taxmann.com 415 (Del)(SB) wherein it was held that only those investments are to be considered for computing average value of investment which yielded investment income during the year, the investments in partnership firms which yielded share of profit ought to be considered. Assessee has earned share of profit only from two partnership firms, namely, Friends Development Corporation and Dosti SeaView Realty LLP. Based on the above finding, disallowance u/s.14A by applying Rule 8D(2)(iii) is re-calculated by taking into account those investments from which exempt income has been earned by the assessee and is tabulated below:
Sr. Investment As on As Average Exempt No. 01.04.2013 31.03.2014 investment income (Rs.) (Rs) (Rs) (Rx)
Mutual fund 25,00,000 25,00,000 25,00,000 6,24,980
Capital 58,29,83,282 19,33,65,511 38,81,74,397 56,71,988 account balance with Friends Development Corp.
Capital 3,61,293 1,66,233 2,63,763 4,940 account balance with Dosti Seaview Realty LLP Total 39,09,38,160 63,01,908
0.5% thereof 19,54,691
Thus, the disallowance u/s.14A comes to Rs.19,54,691/- against which assessee has already suo moto disallowed Rs.5,13,698/-, the balance of Rs.14,40,993/- is to be disallowed and added to the total income of the assessee as against addition of Rs.33,68,410/- made by the ld. Assessing Officer. Accordingly, grounds raised by the assessee are partly allowed.
In the result, appeal of the assessee is partly allowed.
Order is pronounced in the open court on 24 July, 2025