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Income Tax Appellate Tribunal, E BENCH, MUMBAI
order : 22.12.2022 O R D E R Per Rahul Chaudhary, Judicial Member: 1. By way of the present appeal the Appellant/Assessee has challenged the order, dated 23.09.2019, passed by the Ld. Commissioner of Income Tax (Appeals)-33, Mumbai, [hereinafter referred to as „the CIT(A)‟] for the Assessment Year 2014-15 whereby the Ld. CIT(A) had partly allowed the appeal filed by the Appellant against the Assessment Order, dated 21.10.2016 passed under Section 143(3) of the Income Tax Act, 1961 (hereinafter referred to as „the Act‟).
The Appellant has raised the following grounds of appeal:
Assessment Year: 2014-15 “1 The Commissioner of Income Tax (Appeals)-33, Mumbai [CIT(A) erred in confirming the adhoc disallowance of Rs. 11,17,964/- being 5% of various administrative expense claimed by the Appellant on the ground that expenses were not supported by the documentary evidences. In the facts and circumstances of the case, the Appellant submits that the above expenses are incurred wholly and exclusively for business purposes; hence, the disallowance thereof made by the AO shall be deleted. 2.(a) The CIT(A) erred in confirming the action of AO in making disallowance u/s 14A r.w. Rule 8D of the I.T./Rules without recording his dissatisfaction with respect to books of accounts of the Appellant. The Appellant submits that it has not incurred any expenses exceeding Rs. 3,31,283/-; hence, the further disallowance made by the AO shall be deleted. (b) The CIT(A) erred in confirming the action of AO in considering the interest paid to partners for the purposes of disallowance as per Rule 8D(2)(ii) of the I.T. Rules. The Appellant submits that the balances in the partners capital accounts constitute own fund of the Appellant; hence, interest allowable u/s 40(b) of the Act shall not be considered for the purposes of disallowance u/s 14A r.w. Rule 8D(2)(ii) of the I.T. Rules.
The CIT(A) erred in confirming the disallowance of interest expense to the extent of Rs. 37,80,959/- u/s 37 of the Act, made by the AO, out of total interest paid to the partners alleging that the funds have not been utilized for business purposes. The Appellant submits that in the facts and circumstances of the case and provision of law, the interest paid to partners cannot be disallowed u/s 37 of the Act. The Appellant further submits that the interest paid to partners are allowance as per section 40(b)(iv) of the Act; hence, the same cannot be disallowed u/s 37 of the Act.”
3. The relevant facts in brief are that the Appellant filed return of income on 04.10.2014 declaring total income of INR 31,62,74,100/-. The case of the Appellant was selected for Assessment Year: 2014-15 scrutiny and assessment under Section 143(3) of the Act was framed on the Appellant vide Assessment Order, dated 21.10.2016. The Assessing Officer, inter alia, made following additions/disallowances: (i) disallowance of INR 11,17,964/- being adhoc disallowance of 5% of expenses, (ii) disallowance of INR 1,20,19,940/- under Section 14A of the Act, and (iii) disallowance of interest expenses of INR 37,80,959/- under Section 36(1)(iii) of the Act. Being aggrieved, the Appellant filed appeal before CIT(A) on the above additions/disallowances. Since the Appellant was not satisfied with the relief granted by the CIT(A), the Appellant preferred the present appeal before us on the grounds specified in paragraph 2 above which are being taken up hereinafter in seriatim.
Ground No. 1 4. Ground No. 1 pertains to order of CIT(A) confirming the adhoc disallowance of INR 11,17,964/- made by the Assessing Officer at the rate of 5% of various expenses claimed by the Appellant. During the assessment proceedings, the Assessing Officer noted that the Appellant was not maintaining proper supporting documents in respect of expenses claimed as deduction. In response to the show cause notice, the Appellant submitted that the expenses claimed were reasonable and therefore, deduction for the same should be allowed. Taking note of similar disallowance made by the Assessing Officer for the Assessment Year 2009-10, the Assessing Officer disallowed 5% of the various expenses claimed as deduction, and made an addition of INR 11,17,964/-.
In appeal preferred by the Appellant on this issue, the CIT(A) confirmed the disallowance/addition made by the Assessing Assessment Year: 2014-15 Officer following his own order in appeal preferred by the Appellant on the identical issue for the Assessment Year 2012- 13.
Being aggrieved by the order passed by the CIT(A), the Appellant has carried this issue in appeal before us. We note that for the Assessment Year 2009-10 and 2010-11 the Tribunal had declined to interfere in the order passed by the CIT(A) on this issue. The relevant extract of the decision of the Tribunal in the case of the assessee for the Assessment Year 2010-11 [ITA No. 3881 of 2016, dated 31.01.2018] read as under:
“12. In ground no.3, assessee has challenged ad–hoc disallowance of ` 1,04,564 being 5% of various expenses aggregating to ` 20,91,282.
While completing assessment, the Assessing Officer made ad– hoc disallowance of 5% on various expenditure claimed by the assessee for want of supporting details and vouchers. Though the assessee challenged the disallowance before the learned Commissioner (Appeals), he also confirmed the disallowance.
14. Learned Counsel for both the parties agreed that the issue in dispute is decided against the assessee by the Tribunal in order passed for assessment year 2008–09. On a perusal of the order of the Tribunal referred to above, it is noticed that while deciding the issue of ad–hoc disallowance of 5% out of various expenses, the Tribunal did not interfere in the matter and upheld the disallowance. Following the order of the Tribunal, we uphold the disallowance by dismissing the ground raised
by the assessee.”
7. We note that there is no change in the facts and circumstances of the case. No material has been placed before us to persuade us to adopt a view different from the view taken by the Tribunal in the case of the Appellant for the Assessment Year 2008-09 and 2010-11. We are, therefore, not incline to interfere in the Assessment Year: 2014-15 order passed by the CIT(A) on this issue. Ground No. 1 raised by the Appellant is dismissed.
Ground No. 2(a) and 2(b) 8. In the return of income the Appellant had offered suo moto disallowance of INR 3,31,283/- under Section 14A of the Act. The Assessing Officer invoked provisions of Section 14A of the Act read with Rule 8D of the Income Tax Rules, 1962 (hereinafter referred to as „the Rules‟) to compute the disallowance at INR 1,20,19,940/-. In appeal preferred by the Appellant on this issue, the CIT(A) granted relief to the Appellant by directing the Assessing Officer to re-compute disallowance under Section 14A of the Act read with Rule 8D(2)(ii) and 8D(2)(iii) of the by taking into consideration only those investments which yielded exempt income during the year. Further, the CIT(A) also directed the Assessing Officer to reduce the amount of disallowance computed under Section 14A of the Act by the amount of suo moto disallowance of INR 3,31,283/- offered by the Appellant in the return of income. However, not being satisfied, the Appellant has carried this issue in appeal before us.
We have heard the rival submissions and perused the material on record. It was contended on behalf of the Appellant that amount of interest paid to partners on capital should not be taken into consideration while computing disallowance under Section 14A of the Act. We note that the CIT(A) had rejected the aforesaid contention of the Appellant by relying upon the decision of the Mumbai Bench of the Tribunal in the case of Assistant Commissioner of Income Tax 19(3), Mumbai vs. Pahilajrai Jaikishin: [179 TTJ 148 (Mumbai)[01-02-2016].
Assessment Year: 2014-15 Therefore, we decline to interfere in the order passed by the CIT(A) in this regard. During the course of hearing the Ld. Authorised Representative for the Appellant had placed on record computation sheet showing disallowance computed as per the order passed by CIT(A) and had submitted that substantial relief would be granted in case the directions issued by the CIT(A) to include only income yielding investments is implemented. Accordingly, the Assessing Officer is directed to re-compute disallowance under Section 14A of the Act read with Rule 8D(2)(ii)/(iii) of the Rules by taking into account only the investments which yielded exempt income during the previous year relevant to the Assessment Year 2014-15. Accordingly, Ground No. 2(a) and 2(b) raised by the Appellant are disposed off with the aforesaid directions.
Ground No. 3 10. Ground No. 3 pertains to disallowance of interest. During the assessment proceedings, the Assessing Officer noted that the Appellant has claimed deduction of interest expenses of INR 1,63,75,280/-. According to the Assessing Officer, an amount of INR 92.69 Crores was utilized for earning exempt income whereas loans and advances of INR 38.56 Crores given by the Appellant were not related to the business activity of the Appellant. According to the Assessing Officer interest amounting to INR 1,16,49,614/- pertained to non-business activity and was, therefore, not allowable as deduction under Section 37 of the Act. However, since interest amounting to INR 78,68,655/- was already disallowed under Section 14A read with Rule 8D(2)(ii) of the Rules, the Assessing Officer disallowed the balance amount of INR 37,80,959/- .
Assessment Year: 2014-15 11. Being aggrieved, the Appellant preferred appeal before CIT(A) on this issue. It was contended on behalf of the Appellant that entire loans and advances were given for properties to be used for staff accommodation and therefore, interest expenditure pertaining to the same was allowable as deduction. The Appellant was engaged in the business of providing information concerning availability of cargo to and from different ports of India to various shipping companies and agencies outside India, and earns maritime consultancy service fees from the same. The overseas clients of the Appellant were located in different time zones requiring the employees of the Appellant to work for long hours and therefore, accommodation was to be provided to key employees who could work for long hours. Thus, the advances for investment in properties for staff accommodation were on account of business exigencies and the interest expenses were incurred wholly and exclusively for the purpose of business of the appellant. As regards interest on capital, it was contended that though the Appellant was required to pay interest at the rate of 12% on the capital as per the partnership deed, interest at the rate of 1% only was given on the capital to the partners, which has been offered to tax by the respective partners. The payment of interest to partners, therefore, could not be regarded as excessive or unreasonable. Further, interest on partner's capital was allowable as deduction as per provisions of Section 40(b) of the Act and the same could not have been disallowed under Section 36(1)(iii) or Section 37 of the Act. It was further contended that interest on TDS and dishonoured cheque had already been disallowed and interest on car loan was for specific purpose. Therefore, question of disallowance of the same did not arise. On the strength of the Assessment Year: 2014-15 aforesaid, the Appellant sought deletion of disallowance of interest made by the Assessing Officer. However, the CIT(A), without dealing with all the contentions raised by the Appellant, directed the Assessing Officer to re-compute the net disallowance. The relevant extract of the decision of CIT(A) read as under:
“38. I have carefully considered the above submissions of the Id. AR of the appellant and the material available on record. The AO in the assessment order has computed interest attributable to non-business activities at Rs. 1,16,49,614/-. However, as the disallowance of Rs. 78,68,655/- was already made by him u/s 14A, only balance amount of Rs. 37,80,959/- was disallowed u/s 37. Obviously, the balance disallowance to be made here will be outcome of total disallowance re-computed minus re-computed disallowance u/r 8D(2)(ii) and will increase/decrease accordingly. Therefore, if the balance disallowance increases, the same should not be a case of enhancement because it is the outcome of findings in the assessment order and the same is a variable figure. 38.1 In the decision of [2016] 66 taxmann.com 30 (Mumbai - Trib.): ACIT v. Pahilajrai Jaikishin, it was held that Interest paid by the assessee firm to the partners on capital contribution is covered as an 'expenditure' as envisaged u/s 36(1)(ii) of the Act and the assessee firm has to firstly establish its claim of deduction of interest on capital by satisfying the provisions of Section 36(1)(ii) of the Act and then, Section 40(b) of the Act puts limitation on allowability of interest once it passes the requirements of provisions of Section 36(1)(iii) of the Act and thus, interest paid to partners on capital contribution is not a statutory allowance u/s 40(b) of the Act but is an expenditure u/s 36(1)(ii) of the Act. 38.2 Further, the appellant has not placed any evidence in support of its claim that the loans and advances were given for the purpose of business other than the general submission that the same were given to builders as advance for staff accommodation and future business. 38.3 Respectfully following the aforesaid decision of the Mumbai ITAT in case of ACIT v. Pahilajral Jaikishin, the AO's action of making disallowance out of interest paid on partner's capital for the reason that the same was not used for the purpose of business is hereby upheld.
38.4 On perusal of computation, it is found that the appellant has disallowed Interest of Rs. 9,17,260/-. Needless to say, the same cannot be again subjected to any disallowance. Hence, the AO is directed to recompute the net disallowance considering above and re-computed disallowance u/r 8D(2)(ii). The grounds are partly allowed”. 12. Being aggrieved, the Appellant is now in appeal before us.
13. The Ld. Authorised Representative for the Appellant the Ld. Authorised Representative for the Appellant reiterated all the contentions raised before the CIT(A). In addition he submitted that the allowability of interest is governed by Section 36(1)(iii) and further in the case of the firm the maximum interest to be paid to the partner is provided in section 40(b)(iv). Therefore, the lower authorities have invoked the wrong section for making the disallowance. He further submitted that the interest expenses taken into account while computing disallowance under Section 14A of the Act cannot again be considered while computing disallowance under Section 37/36(1)(iii) of the Act.
Per contra, the Ld. Departmental Representative referring to paragraph 8.4 of the assessment order submitted that it was clearly evident that interest bearing fund has been utilized for making investment for non-business purposes. The Appellant had failed to provide specific fund utilization working during the assessment proceedings. She further submitted that the Appellant had clubbed the total interest expenses and therefore, could not claim that interest expenses taken in account for the purpose of deduction under Section 14A of the Act could not be considered while computing disallowance under Section 36(1)(iii) of the Act. The onus was on the Appellant to account for interest expenses separately instead of Assessment Year: 2014-15 clubbing the same in one head. Referring to paragraph 8.2 of the assessment order, she submitted that the during the assessment proceedings the Appellant had taken a stand that it was normal business practice to invest surplus funds to earn interest income, and was not adopting a different stand in the appellate proceedings.
We have considered the rival submission and perused the material on record. We are not inclined to accept the contention raised on behalf of the Appellant that in case interest expenses have been considered for the purpose of computing disallowance under Section 14A read with Rule 8D of the Rules, the entire amount of such interest expenses shall be excluded while considering/computing disallowance under Section 36(1)(iii) or 37 of the Act. The interest expenses computed and disallowed under Section 14A of the Act are those which pertain to earning exempt income. Thus, the scope and purpose of disallowance under Section 14A differs from Section 37/36(1)(iii) of the Act. However, we do agree that that there cannot be double disallowance of same interest expense, firstly, under Section 14A of the Act and thereafter, under Section 36(1)(iii)/37 of the Act. The Assessing Officer and CIT(A) have, to this extent, also granted the benefit to the Assessee. As regards other rival contentions are concerned, on perusal of the order passed by the Assessing Officer and the CIT(A) we note that the specific submission made by the Learned Authorised Representative for the Appellant and the Ld. Departmental Representative turn on the facts which have not been examined in the assessment or the appellant proceedings. The CIT(A) has returned the findings that the Appellant has not placed any evidence in support of its claim 10 Assessment Year: 2014-15 that the loans and advances were given for the purpose of business other than the general submission that the same were given to builders as advance for staff accommodation and future business. However, we note that the Appellant had filed before the Assessing Officer/CIT(A) the details of society charged paid for accommodation of staff and for file storage as well as salary certificate of the employees wherein value of accommodation granted to the employees has been offered to tax as perquisite (placed at page 35 to 67 of the paper-book). Further, the Appellant had also filed details of depreciation claimed in respect of property allotted to office staff along with the reasons for providing such accommodation (placed at page 72 -73 of the paper-book). The finding returned by the CIT(A), to this extent, are contrary to material on record. Therefore, we remand this issue back to the file of the Assessing Officer for denovo adjudication keeping in view our findings hereinabove and after giving the Appellant a reasonable opportunity of being heard. In view of the aforesaid, Ground No. 3 raised by the Appellant is allowed for statistical purposes.
In result, the present appeal is partly allowed.
Order pronounced on 22.12.2022.