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Facts
The assessee, engaged in property development and motion picture production, filed its return for AY 2017-18. The Assessing Officer (AO) made additions of Rs. 14,80,526 under Section 14A and Rs. 1,05,50,000 under Section 68. The CIT(A) upheld these additions. The assessee is in appeal before the Tribunal.
Held
The Tribunal held that Section 14A is applicable to the exempt share of profit from a firm, following a Special Bench decision. Regarding the quantum, it followed the Delhi High Court ruling that disallowance under Section 14A cannot exceed exempt income, directing the AO to restrict it to Rs. 2,42,547. For the addition under Section 68, the Tribunal provided the assessee another opportunity to substantiate the claim, restoring the issue to the AO.
Key Issues
Whether disallowance under Section 14A is applicable to exempt share of profit from a firm and whether the quantum of disallowance should be restricted to the exempt income. Whether the addition under Section 68 is justified based on the evidence filed.
Sections Cited
14A, 68, 143(2), 142(1), 10(2A), 28(v)
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Income Tax Appellate Tribunal, Hyderabad ‘B’ Bench, Hyderabad
Before: SHRI RAVISH SOOD & SHRI MADHUSUDAN SAWDIA
(निर्धारण वर्ा/Assessment Year:2017-18) Shri Ananda Prasad Venigala, Dy. Commissioner of Income Tax, Vs. Circle-1(1), Hyderabad. Hyderabad. PAN:AEWPP1096B (Appellant) (Respondent) निर्धाररती द्वधरध/Assessee by: Shri S. Rama Rao, Advocate रधजस् व द्वधरध/Revenue by:: Dr. Sachin Kumar, SR-DR सुिवधई की तधरीख/Date of hearing: 31/07/2025 घोर्णध की तधरीख/Pronouncement: 06/08/2025 आदेश/ORDER PER MADHUSUDAN SAWDIA, A.M.: This appeal is filed by Shri Ananda Prasad Venigala (“the assessee”), feeling aggrieved by the order passed by the Learned Commissioner of Income Tax (Appeals), National Faceless Appeal Centre (NFAC), Delhi (“Ld. CIT(A)”), dated 18.11.2024 for the A.Y. 2017-18.
The assessee has raised the following grounds of appeal :
“ 1) The order of the learned CIT (A) is erroneous both on facts and in law. 2) The learned CIT (A) erred in confirming the action of the Assessing Officer in applying the provisions of Sec.14A of the I.T.Act and in confirming the addition made under the said section of Rs.14,80,526/-. 3) The learned CIT (A) erred in confirming the action of the Assessing Officer in making addition of Rs. 1,05,50,000/- by applying the provisions of Sec.68 of the I.T.Act. 4) The learned CIT (A) ought to have seen that the amount of Rs.1,05,50,000/- was received from the following persons and all the information necessary to prove the genuineness has been submitted by the appellant; Amount received from: a) Sri Ch.Raghuramaiah - Rs. 5,50,000 b) Sri Danda Brahmanandam - Rs.65,00,000 c) Smt.Danda Laxmirajyam - Rs.35,00,000 5) The entire data has been furnished and the learned CIT (A) erred in not accepting the details furnished by the appellant and in confirming the action of the Assessing Officer in making addition u/s 68 of the I.T.Act. 6) Any other ground/grounds that may be urged at the time of hearing.”
The brief facts of the case are that, the assessee is engaged in the business of property development and motion picture production. The assessee filed its return of income for the assessment year 2017–18 on 30.10.2017, declaring a total income of Rs.2,30,97,190/-. The case of the assessee was selected for scrutiny under CASS and notices under Sections 143(2) and 142(1) of the Income Tax Act, 1961 (“the Act”) were issued. After considering the submissions of the assessee, the Learned Assessing Officer (“Ld. AO”) made the additions of Rs.14,80,526/- under Section 14A of the Act and Rs.1,05,50,000/- under Section 68 of the Act. Accordingly, the assessment was completed by Ld. AO under Section 143(3) of the Act on 28.12.2019, determining the total income at Rs.3,51,27,716/-.
Aggrieved with the order of Ld. AO, the assessee filed an appeal before the Ld. CIT(A), who upheld the additions. The assessee is now in appeal before this Tribunal.
At the outset, the Learned Authorised Representative (“Ld. AR”) submitted that the present appeal concerns two issues i.e. (a) disallowance under Section 14A of the Act of Rs.14,80,526/- and (b) addition under Section 68 of the Act of Rs.1,05,50,000/-.
As far as the disallowance under Section 14A of the Act is concerned, the Ld. AR first submitted that the disallowance is unjustified because the Ld. AO failed to record proper satisfaction, as required under Section 14A(2), before invoking Rule 8D.
6.1 In the alternative, the Ld. AR submitted that no exempt income was earned by the assessee during the relevant previous year, and therefore, no disallowance under Section 14A of the Act can be made. However, on being confronted with the computation of income placed at page no.1 of the paper book, the Ld. AR acknowledged that the assessee had shown exempt income of Rs.2,42,547/-, being share of profit from partnership firm M/s Aditya 70MM A/c DTS. The Ld. AR then contended that since the salary received from the firm is taxable in the hands of the assessee, the application of Section 14A of the Act to exempt share of profit from the firm should not arise. He argued that Section 14A of the Act has no application in the context of a partnership firm where only part of the income (salary) is taxable and the share of profit is exempt under Section 10(2A) of the Act.
With respect to the addition under Section 68, the Ld. AR submitted that the Ld. AO made addition of Rs.1,05,50,000/- under section 68 of the Act, being not satisfied with the identity, credit- worthiness of the loan creditor and genuineness of the transaction. The assessee had filed only copies of ledger account of the creditors before the Ld. AO during the assessment proceedings. However, other evidences in support of the identity, credit-worthiness of the loan creditor and genuineness of the transaction could not be filed before the Ld. AO. The assessee had filed complete details of the loan creditor including confirmation letter, Ledger account , Income tax return acknowledgment and Bank statement (page nos. 39 to 50 of the paper book) before the Ld. CIT(A), but the Ld. CIT(A) refused to admit the same without any detailed examination, despite the fact that these go to the root of the matter. The Ld. AR urged the Tribunal to admit the documents now placed in the paper book and remand the matter to the Ld. AO for fresh verification in the interest of natural justice.
Per contra, the Learned Departmental Representative (“Ld. DR”) supported the orders of the lower authorities. As far as the disallowance under section 14A of the Act is concerned, the Ld. DR invited our attention to para 3.4 of the Ld. AO’s order, where the Ld. AO has clearly recorded his satisfaction. Hence, the Ld. DR submitted that, invocation of Rule 8D by Ld. AO was justified.
8.1 With respect to the alternate argument of the assessee, the Ld. DR submitted that the assessee did earn exempt income of Rs.2,42,547/- from share of profit from the firm, which is exempt under Section 10(2A) of the Act. Hence, Section 14A of the Act is clearly attracted. The Ld. DR submitted that the argument that Section 14A of the Act does not apply to share of profit from a firm is legally untenable, as the exemption is under the Act and the disallowance must be computed to the extent of the exempt income.
As far as the addition made by the Ld. AO under Section 68 of the Act is concerned, the Ld. DR invited our attention to para 4.4.1 of the order of the Ld. AO, where it is clearly mentioned that the assessee failed to submit any confirmation or supporting evidence during the course of assessment. He further invited our attention to para 5.1 of the Ld. CIT(A)’s order, which states that no application for admission of additional evidence was made and no reasons were provided for not filing the documents earlier. Accordingly, the Ld. DR submitted that the additional evidence should not be admitted at this stage and prayed that this ground of the assessee should be dismissed.
We have heard the rival contentions and perused the material available on record. We have perused para nos.3 to 3.4 of the order of the Ld. AO, which is to the following effect :
10.1 On perusal of above, we find that the Ld. AO at para no. 3.4 of it’s order has duly recorded his satisfaction regarding the applicability of section 14A of the Act. Therefore, the precondition for invoking Rule 8D is satisfied. Accordingly, the contention of the Ld. AR that, no satisfaction has been recorded by the Ld. AO, is rejected.
10.2 As regards the alternate contention of the Ld. AR that no exempt income was earned, we note from the computation of income placed at page no.1 of the paper book that the assessee had earned exempt income of Rs.2,42,547/-, being share of profit from a partnership firm. Hence, this contention is factually incorrect. Further, we find the argument of the Ld. AR that Section 14A is not applicable to share of profit from partnership firm because salary received from the firm is taxable, to be legally incorrect. We find that the similar issue have been dealt by the Special bench of the Tribunal in the case of Shri Vishnu Anant Mahajan v/s ACIT, in for A.Y.2006-07 dated 25.07.2012 at para no.7 of it’s order, which is to the following effect :
“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 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 A.Y.: 06-07 Page 4 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 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 A.Y.: 06-07 Page 5 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.” 10.3 On perusal of above, we found that, the Special Bench of the Tribunal has held that, Section 10(2A) clearly exempts the share of profit in the hands of the partner, and to that extent, Section 14A squarely applies. The fact that salary is taxable does not render Section 14A inapplicable to the exempt portion. Therefore, respectfully following the decision of Special Bench of the Tribunal, we hold that, section 10(2A) clearly exempts the share of profit in the hands of the partner, and to that extent, section 14A squarely applies. The fact that salary is taxable does not render section 14A inapplicable to the exempt portion. Accordingly, the contention of the Ld. AR that the section 14A is not applicable to the assessee, is rejected.
10.4 Further, as far as the quantum of disallowance under section 14A of the Act is concerned, we found that the Hon’ble Delhi High Court in the case of Joint Investments Pvt. Ltd. v/s CIT (2015) 372 ITR 694 dated 25.02.2015 at para no.9 of it’s order has dealt with the similar issue, which is to the following effect :
“9. In the present case, the AO has not firstly disclosed why the appellant/assessee's claim for attributing `2,97,440/- as a disallowance under Section 14A had to be rejected. Taikisha says that the jurisdiction to proceed further and determine amounts is derived after examination of the accounts and rejection if any of the assessee's claim or explanation. The second aspect is there appears to have been no scrutiny of the accounts by the AO - an aspect which is completely unnoticed by the CIT (A) and the ITAT. The third, and in the opinion of this court, important anomaly which we cannot be unmindful is that whereas the entire tax exempt income is `48,90,000/-, the disallowance ultimately directed works out to nearly 110% of that sum, i.e., `52,56,197/-. By no stretch of imagination can Section 14A or Rule 8D be interpreted so as to mean that the entire tax exempt income is to be disallowed. The window for disallowance is indicated in Section 14A, and is only to the extent of disallowing expenditure "incurred by the assessee in relation to the tax exempt income". This proportion or portion of the tax exempt income surely cannot swallow the entire amount as has happened in this case.” 10.5 On perusal of above, we found that the Hon’ble Delhi High Court has held that the disallowance under Section 14A cannot exceed the quantum of exempt income. Respectfully following the order of Hon’ble Delhi High Court, we direct the Ld. AO to restrict the disallowance under Section 14A to Rs.2,42,547/-, being the actual amount of exempt income earned by the assessee. Accordingly, this issue of the assessee is partly allowed.
As far as the addition under section 68 of the Act is concerned, we have considered the documentary evidence filed in the paper book, including confirmation, ledger, ITR and bank statement of the loan creditors which were not filed before the Ld. AO at the time of assessment. The same were first time filed before the Ld. CIT(A). However in absence of proper application for acceptance of additional evidence, the documents were not considered by Ld. CIT(A). Accordingly, the Ld. CIT(A) upheld the addition made by the Ld. AO. Nevertheless, in the interest of natural justice, we are inclined to provide one more opportunity to the assessee to substantiate their claim. Therefore,, the issue regarding the addition under Section 68 of the Act is restored to the file of the Ld. AO for fresh adjudication after granting opportunity to the assessee to file supporting evidence. The assessee is directed to cooperate and furnish all documents before the Ld. AO as may be required. Accordingly, this issue of the assessee is allowed for statistical purposes.
In the result, the appeal of the assessee is partly allowed for statistical purposes.
Order pronounced in the open Court on 6th August, 2025.