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Income Tax Appellate Tribunal, PUNE BENCH “B”, PUNE
आदेश / ORDER PER ANIL CHATURVEDI, AM :
This appeal filed by the Revenue is emanating out of the order of 1. Commissioner of Income Tax (A) – 8, Pune dated 29.12.2016 for the assessment year 2012-13.
The relevant facts as culled out from the material on record are as under :-
Assessee is a partnership firm stated to be engaged in the business of processing of cattle feed. Assessee filed its return of income for A.Y. 2012-13 on 22.09.2012 declaring total taxable income of Rs.5,49,30,013/-. The case was selected for scrutiny and thereafter
assessment was framed u/s 143(3) of the Act vide order dated
27.03.2015 and the total income was determined at Rs.6,38,07,290/-.
Aggrieved by the order of AO, assessee carried the matter before
Ld.CIT(A), who vide order dated 29.12.2016 (in appeal No.PN/CIT(A)-
8/ACIT, Satara Circle/83/2015-16/198) granted partial relief to the
assessee. Aggrieved by the order of Ld.CIT(A), Revenue is now in appeal
before us and has raised the following effective ground. :
“Whether on the fact and in the circumstances of the case and in law, the Ld. CIT(A) is correct in reducing the disallowance u/s. 14A r.w. Rule 8D of Rs. 88,77,276/- to Rs. 1,98,410/- without appreciating the fact that rnterest bearing fund was utilized by the assessee firm to earn exempt income and hence interest paid by the assessee firm on borrowed fund is required to be disallowed as per section 14A of IT Act, 1961 read with Rule 80 IT Rules 1962 ?”
During the course of assessment proceedings, AO noticed that
assessee had shown Rs.39,77,585/- as exempt income which included
dividend income from investments in mutual funds. The assessee was
asked to show cause as to why the proportionate expenditure has not
been disallowed u/s 14A of the Act, to which assessee inter-alia
submitted that assessee has not incurred any expenditure for earning
exempt income. The submissions of the assessee were not found
acceptable to the AO. AO noticed that assessee had investments of
Rs.6,06,45,545/- in mutual funds. He also noticed that the partners of
the assessee had brought huge capital to the extent of Rs.22.90 crores
and assessee firm had paid interest on the capital to the partners. He
noted that the total interest on capital paid by the firm was to the extent
of Rs.2.09 crores. AO was of the view that assessee had diverted
interest bearing funds for making investments. He was also of the view
that apart from direct expenditure, indirect expenditure was also
incurred for running exempt income. He thus, worked out the interest
expenses at Rs.55,34,939/- and thereafter he worked out the
disallowance u/s 14A r.w. Rule 8D of I.T. Rules and made its addition.
Aggrieved by the order of AO, assessee carried the matter before
Ld.CIT(A).
Ld.CIT(A) while granting partial relief to the assessee has noted
that the AO’s finding that the capital of the partners which has been
diverted for making investments in mutual funds and on it paying
interest is not equivalent to borrowed funds and for which Ld.CIT(A) has
relied on the decision in the case of Quality Industries Vs. JCIT
reported in (2016) 161 ITD 0217 (Pune). She also noted that the
Tribunal has held that the capital of the partners in a firm does not
amount to borrowed funds and the interest paid thereon is not the
interest as envisaged u/s 36(1)(iii) of the Act. She has further noted
that the Tribunal has also held that the interest paid by partnership
firms towards use of the partner’s capital does not amount to
expenditure for the purpose of Sec.14A of the Act and accordingly such
interest on partners capital cannot be considered for making
disallowance u/s 14A r.w.s R 8D of I.T. Rules. With respect to
disallowance under 8D(2)(i) of I.T. Rules she has given a finding that the
interest of Rs.2,199,989/- and commission of Rs.1,48,686/- cannot be
considered for earning exempt income under Rule 8D(2)(ii) of I.T. Rules.
She however upheld the disallowance on account of administrative
expenses and thus upheld the disallowance to the extent of
Rs.1,98,410/-.
Aggrieved by the order of Ld.CIT(A), Revenue is now in appeal
before us.
Before us, Ld. D.R. supported the order of AO. Ld.A.R. on the
other hand reiterated the submissions made before lower authorities
and supported the order of Ld.CIT(A).
We have heard the rival submissions and perused the material on
record. The issue in the present case is with respect to the disallowance
u/s 14A r.w. Rule 8D of I.T. Rules. We find that Ld.CIT(A) while
granting partial relief to the assessee after relying on the decision of
Pune Tribunal in Quality Industries Vs. JCIT (supra) has held that
interest paid on partner’s capital account cannot be considered as
interest for the purpose of disallowance u/s 14A of the Act. She has
also given a finding that interest and commission expenses cannot be
considered to have been incurred for earning exempt income. Before us,
Revenue has neither placed any contrary binding decision in its support
nor has pointed out any fallacy in the findings of Ld.CIT(A). In such a
situation, we find no reason to interfere with the order of Ld.CIT(A).
Thus, the ground of the Revenue is dismissed.
In the result, the appeal of Revenue is dismissed.
Order pronounced on 12th day of September, 2019.
Sd/- Sd/- (SUSHMA CHOWLA) (ANIL CHATURVEDI) �या�यक सद�य / JUDICIAL MEMBER लेखा सद�य / ACCOUNTANT MEMBER
पुणे Pune; �दनांक Dated : 12th September, 2019. Yamini
आदेश क� ��त�ल�प अ�े�षत/Copy of the Order forwarded to : 1. अपीलाथ� / The Appellant 2. ��यथ� / The Respondent 3. CIT(A)-8, Pune. Pr. CIT-3, Pune. 4. 5 �वभागीय ��त�न�ध, आयकर अपील�य अ�धकरण, “बी” / DR, ITAT, “B” Pune; गाड� फाईल / Guard file. 6.
आदेशानुसार/ BY ORDER
// True Copy // व�र�ठ �नजी स�चव / Sr. Private Secretary आयकर अपील�य अ�धकरण ,पुणे / ITAT, Pune.