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Income Tax Appellate Tribunal, AHMEDABAD “C” BENCH
Before: Shri Rajpal Yadav & Shri Amarjit Singh
आदेश/ORDER PER : AMARJIT SINGH, ACCOUNTANT MEMBER:-
These two assessee’s appeals for A.Y. 2011-12 & 2008-09, arise from order of the CIT(A)-9, Ahmedabad dated 05-01-2015, in proceedings under section 143(3) of the Income Tax Act, 1961; in short “the Act”.
The assessee has raised following grounds of appeal:- ITA no. 755/Ahd/2015 “1. Ld. CIT (A) erred in law and on facts in dismissing the ground challenging reassessment order passed by AO on the basis of same records without any tangible material brought on record. Ld. CIT (A) failed to appreciate that re opening on issue for
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which detailed inquiry made and opinion formed in original assessment u/s 143 (3) of the Act amounts to change of opinion not permissible under law. Ld. CIT (A) ought to have quashed the order. 2. Ld. CIT (A) erred in law and on facts in confirming validity of proceedings challenged by the appellant vide additional ground at the late stage of appellate proceedings. Ld. CIT (A) ought not to have dismissed the ground holding that objections were already dealt with by AO in assessment order. 3. Ld. CIT (A) erred in law and on facts in confirming disallowance made by AO of Rs. 1, 79, 748/- u/s 14A r w Rule 8D of the Act. Ld. CIT (A) ought to have deleted disallowance when the appellant had sufficient interest free funds than amount invested in partnership firm and without any nexus established by AO between investment and interest bearing funds. 4. Ld. CIT (A) erred in law and on facts confirming action of AO in treating taxable interest earned on capital invested in partnership firm liable to the provisions of sec 14A of the Act as profit from firm is exempt u/s 10(2A) of the Act. Ld. CIT (A) failed to appreciate that interest on the capital contribution is to be paid irrespective of profit sharing ratio. Ld. CIT (A) ought to have deleted disallowance as no part of interest expenditure relates to share of profit from the firm exempt u/s 10(2 A) of the Act. 5. Ld. CIT (A) erred in law and on facts in confirming disallowance made by AO ignoring interest paid on borrowings for investing in partnership firm has direct nexus with interest earned from firm taxed as business income. Ld. CIT (A) ought to have deleted disallowance u/s 14A towards exempt income earned on strategic investments. It be so held now. 6. Ld. CIT (A) erred in law and on facts in not appreciating that disallowance of interest on amount borrowed for the purpose of investing in partnership firm is an allowable expense u/s 36(1)(iii) of the Act. Under the facts and circumstances of the case Id. CIT (A) ought to have held that disallowance neither u/s 14A nor u/s 36(1)(iii) deserves to be made. 7. Ld. CIT (A) erred in law and on facts in confirming computation by AO holding that total interest expenditure instead of net expenditure debited to profit & loss account be taken for working disallowance under Rule 8D. 8. Without prejudice to the above, any disallowance of interest expenditure if at all is to be made as per Rule 8D, then correct disallowance ought not to be more than Rs. 33, 415/- submitted to AO by the appellant. Ld. CIT (A) ought to have deleted excess disallowance made by AO. It be so held now. 9. Ld. CIT (A) erred in law and on facts in confirming disallowance by AO of Rs. 34, 233/- towards administrative expenses computing disallowance under Rule 8D. Ld. CIT (A) ought to have deleted disallowance in absence of any such finding by AO of expenditure incurred by the appellant. 10. Levy of interest u/s 234B & 234C of the Act is unjustified. 11. Initiation of penalty proceedings u/s 271 (1)(c) of the Act is unjustified.” 2.1 Excluding the ground of appeals raised on the issue of reopening of assessment as per ground no. 1 & 2 for assessment year 2008-09, all other grounds of appeals for both the appeals are interconnected pertaining to the common issues based on similar facts and circumstances therefore for the sake of convenience ITA no. 755/Ahd/2015 is adjudicated and its finding be applicable to the ITA 754/Ahd/2015 of the appeal of the assessee.
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Ground nos. 3 to 8 are inter connected to the common issue of disallowance of interest expenditure and ground of appeal no.9 is pertained to the disallowance of administrative expenditure by the assessing officer u/s. 14A r.w. Rule 8D of the IT Rule. For the sake of convenience these grounds of appeal are adjudicated together as under:-.
4 The fact in brief is that assessee has filed return of income declaring income of Rs. 61,92,618/- on 24th December, 2010. Thereafter, original assessment was passed u/s 143(3) of the act on 24th December, 2010 determining total income at Rs. 65,32,091/-. Thereafter, the case was reopened u/s 147 of the act by issuing of notice u/s. 148 of the act on 30th March, 2013. During the reassessment the assessing officer noticed that assessee has earned exempt income of Rs. 99,49,545/- u/s. 10(2A) during the year under consideration. It was also seen that he assessee had made investment of Rs. 1,43,18,186/- and had also borrowed amount of Rs. 5,43,39,116/- and Rs. 90,81,281/- on account of secured loan and unsecured loan respectively during the year under consideration. The assessee has claimed interest expenditure of Rs. 63,44,380/- during the year under consideration. In the light of the above circumstances the assesee was asked to work out the amount of expenditure pertaining to earning exempt income according to provision of section 14A r.w. Rule 8D of the IT Rules. In response the assessee has worked out disallowance of Rs.33,415 u/s. 14A r.w. Rule 8D of the IT rule. On verification of the working furnished by the assessee the assessing officer noticed that assessee has not taken into consideration the funds deployed in the partnership firm while working out the afore said disallowance. The assessee has explained that it has made investment in the partnership firm name M/s. Prithvi Associate in the fixed capital and current capital. It was further explained that fixed capital should be taken as the amount in calculating average total investment in the said firm. It was explained that the current capital invested in the partnership firm should not be included for average total investment as the assessee has earned taxable
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interest on the current capita. It was also explained that assessee was having substantial interest free fund and no expenditure was incurred for earning exempt income. The assessing officer has not accepted the explanation of the assessee on the ground that assessee hasn’t furnished any evidence to suggest that the investments were made from own fund and there was no utilization of borrowed fund in its investment in the partnership firm. Therefore, the assessing officer has worked out the disallowance u/s. 14A r.w. Rule 8D of the IT rule to the amount of Rs. 1,79,748/-(Interest Rs.1,45,515 + Other Exp. Rs.34,233).
Aggrieved assessee has filed appeal before the ld. CIT(A). The ld. CIT(A) has sustained the disallowance by holding that disallowance u/s 14 A is to be made against interest expenditure debited in the P& L a/c.
During the course of appellate proceedings before us, the ld. counsel has submitted paper book containing details and information submitted to the assessing officer and ld. CIT(A) at the time of assessment and appellate proceedings during the year under consideration. The ld. counsel has also placed reliance upon the decision of jurisdictional high court in the case of principal CIT vs. Nirma Credit and Capital Pvt. Ltd. 85 taxmann.com 72 dated 31st August, 2017 wherein it is held that when the assessee pays interest on borrowing as also earns taxable income on investment made by him during a particular year, his interest expenditure has to be considered as one which is net of interest paid and interest earned. On the other hand, ld. departmental representative has supported the order of ld. CIT(A).
Regarding grounds of appeals no. 1 to 2 relating to reopening of assessment after hearing both the sides and perusal of material on record we observed that the assessing officer has not made any detailed inquiry and not formed any opinion in the origional assessment u/s 143(3) regarding the issue of disallowance of any expenditure u/s. 14A r.w. rule 8D of the IT Rule pertaining to
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earning of exempt income from the investment made by the assessee in the partnership firm as a partner. Therefore, we do not find any error in the decision of the ld. CIT(A) on this issue. Accordingly, this ground of appeal of the assessee is rejected.
Grounds of appeal from 3 to 9: These grounds of appeal are inter connected to the issues regarding disallowance made by the assessing officer u/s. 14A r.w.s Rule 8D of the Rule, therefore, these grounds of appeal are adjudicated together. The assesse has made investment in the partnership firm as a partner in the form of fixed capital and current capital. The assessee has earned interest income on its investment as fixed and current capital. The interest income earned from its investment as current capital of the firm has been included in the income of the assesee as taxable business income. We have perused the decision of jurisdictional high court in the case of principal CIT vs. Nirma Credit and Capital Pvt. Ltd. 85 taxmann.com 72 dated 31st August, 2017 on the identical issue of making disallowance of interest expenditure for purpose of clause (ii) of sub-rule (2) of the rule 8D wherein it is held that prior to its amendment with effect from 2.6.2016, what would be considered as amount of expenditure by way of interest would be the interest paid by the assessee on the borrowing minus the taxable interest earned during the financial year.
Respectfully following the decision of the jurisdictional High Court we direct the assessing officer to compute the disallowance as laid down in the judgment of Hon'ble Gujarat High Court as supra in respect of disallowance out of interest expenditure for applicability of clause (ii) of sub-rule (2) of the rule 8D of the IT Rule. Accordingly the ground of appeal of the assessee on issue is allowed for statstical purposes.
In respect of disallowance of Rs.34,233/ towards administrative & other expenses the assessing officer has observed that investment made by the
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assessee generate substantial tax exempt and not accepted the general submission of the assessee that no expenditure has been incurred for earning exempt income. We find that the assessee has failed to substantiate that no administrative expenditure has been incurred for earning exempt income. In view of the above we do not find merit in the ground of appeal of the assessee relating to disallowance out of administrative expenditure therefore the same is dismissed.
The ground no. 10 of the assessee towards levy of interest u/s 234B&234C are dismissed as charging of interest are mandatorily under the said provision.
The ground no. 11 of the assessee regarding initiation of penalty proceeding u/s 271(1)(c) is premature at this stage therefore the same is also dismissed.
In the result the appeal of the assessee is partly allowed for statistical purposes. Order pronounced in the open court on 11-10-2018
Sd/- Sd/- (RAJPAL YADAV) (AMARJIT SINGH) JUDICIAL MEMBER ACCOUNTANT MEMBER Ahmedabad : Dated 11/10/2018 आदेश क� ��त�ल�प अ�े�षत / Copy of Order Forwarded to:- 1. Assessee 2. Revenue 3. Concerned CIT 4. CIT (A) 5. DR, ITAT, Ahmedabad 6. Guard file. By order/आदेश से, उप/सहायक पंजीकार आयकर अपील�य अ�धकरण, अहमदाबाद