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Income Tax Appellate Tribunal, MUMBAI BENCH “SMC”, MUMBAI
Before: SHRI MAHAVIR SINGH & SHRI RAJESH KUMAR
Per Rajesh Kumar, Accountant Member:
The present appeal has been preferred by the assessee against the order dated 15.11.2019 of the Commissioner of Income Tax (Appeals) [hereinafter referred to as the CIT(A)] relevant to assessment year 2014-15.
The grounds raised by the assessee are reproduced as under: “GROUND NO. 1
The Hon'ble Commissioner of Income Tax (Appeals) -17 (CIT (A) has erred in law and on facts by confirming the addition made by the Learned Assessing Officer on account of adding notional Interest of Rs.15,98,141 @ 7% on capital balance in the partnership firm as income of the Appellant. GROUND NO. 2
2 M/s. Periar Trading Co. Pvt. Ltd. The Hon'ble CIT (A) has erred in law and on facts by confirming the addition made by the Learned Assessing Officer on account of disallowance of expenditure under section 14A r.w. Rule 8D(2)(iii) which is in excess of amount debited to Profit and Loss Account. GROUND NO. 3 The Hon'ble CIT (A) has erred in law and in facts by confirming the addition made by the Learned Assessing Officer on account of adding notional interest on capital balance in partnership firm and disallowance under section 14A to the Net profit as per Profit and Loss account for computing the book profits under section 115JB of the Act.
Your appellant craves leave to add to and/or to amend and/or to modify and/or to cancel any one or more grounds of appeal at any time before or at the time of hearing.”
3. The issue raised in ground No.1 is against the order of Ld. CIT(A) confirming the addition made by the AO on notional basis @ 7% of capital balance in the partnership firm which comes to Rs.15,98,141/-. The Ld. Counsel of the assessee at the outset submitted that the issue is squarely covered by the decision of the co-ordinate Bench of the Tribunal in assessee’s own case in A.Y. 2012-13 wherein it has been held that supplementary deed entered into by the assessee was duly executed on stamp paper and as such holds legal validity and has all its legal effects. The Ld. Counsel submitted before us that the issue may be decided in terms of the decision of the co- ordinate Bench of the Tribunal in ITA No.1944/M/2018 A.Y. 2012-13 dated 09.11.2018. The Ld. A.R. also made without a prejudice submission that in case the addition on account of interest on capital balance of Rs.15,98,141/- is held to be valid then a corresponding deduction may be directed to be allowed in the assessment of the partnership firm.
The Ld. D.R., on the other hand, relied heavily on the order of the AO and Ld. CIT(A). The Ld. D.R. submitted that since the 3 M/s. Periar Trading Co. Pvt. Ltd. supplementary deed is not registered, therefore, the income has accrued in the hand of the partner on the capital balance standing to his credit and therefore submitted that the order of Ld. CIT(A) may kindly be affirmed.
After hearing both the parties and perusing the material on record including the decision of the co-ordinate Bench of the Tribunal in A.Y. 2012-13 dated 09.11.2018 in assessee’s own case, we find that a similar issue has been restored to the file of the AO with certain directions. The operative part of the decision is reproduced as under: “21. Before us, assessee contended that the deed was not modified pertaining to the below changes and thus, the same has not been registered with the Registrar of Firms. But, the supplementary deed entered by the assessee was duly executed on a stamp paper and as such, holds legal validity. Now, before us, ld. Counsel stated that even under section 40(b) of the Act, which provides the allowance for remuneration and interest expense of partners for a partnership firm does not provide for a requirement to have the partnership firm registered in order to allow the expenses in the hands of the firm. Even otherwise, the income has not accrued to the assessee we find that these facts need verification and hence, the same are restored back to the file of the AO. This issue of the assessee’s appeal is allowed for statistical purposes.”
Accordingly, respectfully following the decision of the co- ordinate Bench of the Tribunal, we restore the issue to the file of the AO with similar directions. The ground is allowed for statistical purposes.
The issue raised in ground No.2 is against the confirmation of addition as made by the AO under rule 8D2(iii) which is stated to be more than the amount of expenses charged to P&L Account.
The facts in brief are that during the course of scrutiny proceedings, the AO noticed that assessee has earned exempt
4 M/s. Periar Trading Co. Pvt. Ltd. income of Rs.78,16,619/- and it has disallowed expenses of Rs.33,693/- as expenses relating to earning of exempt income. Accordingly, a show cause notice was issued to the assessee as to why provisions of section 14A rule 8D should not be applied to the assessee’s case to determine the disallowance. In response, the assessee furnished working of expenses relating to rule 8D2(iii) at Rs.6,47,828/- which were disallowed by the AO under rule 8D2(iii) by adding the same to the income of the assessee.
The Ld. CIT(A) in the appellate proceedings affirmed the same on the ground that the same is in accordance with provisions of rule 8D2(iii).
After hearing both the parties and perusing the material on record, we find that the assessee has only claimed total expenses in the P&L account of Rs.33,693/- and therefore we find merit in the contention of the assessee that disallowance under rule 8D2(iii) can not exceed the amount of exempt income. The case of the assessee finds support from the decision of the co-ordinate Bench of the Tribunal in A.Y. 2012-13 order dated 09.11.2018 in assessee’s own case. Accordingly, we set aside the order of Ld. CIT(A) and direct the AO to restrict the disallowance to Rs.33,693/- which has been suo-moto disallowed by the assessee. The ground no 2 is allowed.
The issue raised in 3rd ground of appeal is against the confirmation of addition of notional interest on capital balance in partnership firm as referred to in ground No.1 and also
12. At the outset, we find that the issue is squarely covered by the special bench decision in the case of ACIT vs. Vireet Investment Pvt. Ltd. (2017) 82 taxmann.com 415 (Del-Trib) (spl. Bench) wherein it has been held that computation under clause (f) of explanation 1 to section 115JB(2) is to be made without resorting to computation as contemplated under section 14A read with rule 8D. So the AO is directed not to make any addition to book profits on account of any disallowance made relating to earning of exempt income. So far as the addition of notional interest on capital balance is concerned, we have already restored the ground No.1 to the file of the AO, therefore AO is directed not to make any addition to the book profit under section 115JB of the Act. Ground is allowed.
In the result, the appeal of the assessee is allowed.
Order pronounced in the open court on 26.10.2021.