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Income Tax Appellate Tribunal, PUNE BENCH “A”, PUNE
Before: SHRI S. S. GODARA & SHRI INTURI RAMA RAO
ORDER PER INTURI RAMA RAO, AM: These are the appeals filed by the assessee directed against the separate orders of ld. Commissioner of Income Tax (Appeals)- 1, Nashik [‘the CIT(A)’] dated 08.05.2019 for the assessment years 2012-13 and 2013-14 respectively.
Since the identical facts and common issues are involved in both the above captioned appeals, we proceed to dispose of the same by this common order.
For the sake of convenience and clarity, the facts relevant to the appeal in for the assessment year 2012-13 are stated herein.
2 & 994/PUN/2019 ITA No.993/PUN/2019, A.Y. 2012-13 : 4. The appellant raised the following grounds of appeal :- “1. In the facts and in the circumstances of the case that learned Hon’ble Commissioner of Income Tax (Appeals)-I, Nashik is wrong in confirming the disallowance u/s 14A r.w.r. 8D of Rs. 14,19,369/- (disallowance by the appellant of Rs. 7,09,194/- and disallowed by assessing officer Rs. 7,10,115) without considering the fact that the interest paid on the own capital of the partners of Rs. 95,82,946/- should not be considered for the purpose of disallowance.
2. The Learned Assessing Officer and the Learned Hon’ble CIT Appeal failed to appreciate that the mutual funds on which no income is yielded during the financial year should be excluded while calculating the average investments and the growth mutual funds on which the income is taxable should be excluded from the calculation of average investment.
3. The learned Income Tax officer and CIT Appeal ought to have considered the fact that the appellant has not incurred any expenditure to earn income on Mutual funds and other income and interest on capital accounts of partners.”
5. Briefly, the facts of the case are as under : The appellant is a company incorporated under the provisions of the Companies Act, 1956. It is engaged in the business of manufacture of poultry equipments. The Return of Income for the assessment year 2012-13 was filed on 29.09.2012 declaring total income of Rs.4,02,28,533/-. Against the said return of income, the assessment was completed by the Dy. Commissioner of Income Tax, Circle-1, Nashik (‘the Assessing Officer’) vide order dated 23.03.2015 passed u/s 143(3) of the Income Tax Act, 1961 (‘the Act’) at a total income of Rs.4,09,38,708/-. While doing so, the Assessing Officer made addition of Rs.7,10,175/- under the provisions of section 14A of the Act.
3 & 994/PUN/2019 6. Being aggrieved by the above addition, an appeal was filed before the ld. CIT(A), who vide impugned order confirmed the action of the Assessing Officer.
Being aggrieved by the decision of the ld. CIT(A), the appellant is in appeal before us in the present appeal.
It is contended before us that for the purpose of disallowance of interest u/s 14A, the interest paid on the capital contribution made by the partners of the firm, cannot be considered. Further, it is submitted that for the purpose of computing the average value of investments, the value of those investments, which yielded the exempt income alone has to be considered.
We heard the rival submissions and perused the material on record. The issue in ground of appeal no.1 relates to the addition u/s 14A of the Act. The contention of the appellant that no exempt income was earned and no interest bearing funds were utilized for the purpose of making investments in shares, which yielded the exempt income, was not accepted by the lower authorities. We find from the orders of the lower authorities that the appellant had contended that no addition u/s 14A can be made in the absence of any exempt income. Also, when the books of accounts and financial statements are available with the Assessing Officer, the Assessing Officer can easily find out whether there is an exempt income or not, which the Assessing Officer failed to do so. The 4 & 994/PUN/2019 contention of the appellant is supported by the several judicial precedents, wherein, it is held that in the absence of any exempt income, resort to the provisions of section 14A of the Act cannot be made. The various High Courts in catena of decisions held the same view and reference can be made to the following decisions :- (i) Redington (India) Ltd. vs. Addl. CIT, 392 ITR 633 (Mad); (ii) CIT vs. Celebrity Fashion Ltd., 428 ITR 470 (Mad); (iii) CIT vs. Chettinad Logistics Pvt. Ltd., 80 taxmann.com 221 (Mad) (Against which the SLP filed by the Department was dismissed by the Hon’ble Supreme Court in the case of CIT vs. Chettinad Logistics P. Ltd., 95 taxmann.com 250 (SC); (iv) CIT vs. Continuum Wind Energy (India) Pvt. Ltd., 430 ITR 52 (Mad); (v) PCIT vs. Kohinoor Project Pvt. Ltd., 425 ITR 700 (Bom.); (vi) Cheminvest Ltd. vs. CIT, 378 ITR 33 (Delhi); (vii) MAN Infraprojects Ltd. (ITA No.259 of 2017 dated 09.04.2019) (Bom.).
10. The Jurisdictional High Court in the case of PCIT vs. Kohinoor Project Pvt. Ltd. (supra) placing reliance on the decision of the Hon’ble Delhi High Court in the case of Cheminvest Ltd. vs. CIT (supra) and its own decision in the case of MAN Infraprojects Ltd. (supra) held as follows :- “8. Section 14A of the Act deals with expenditure incurred in relation to income not includible in total income. As per sub-section (1) of section 14A, for the purpose of computing the total income, no deduction shall be allowed in respect of expenditure incurred by the assessee in relation to income which does not form part of the total income. In Cheminvest Ltd. (supra) Delhi High Court examined the expression "does not form part of the total income" as appearing in sub-section (1) of section 14A of the Act. Delhi High Court held that the said expression envisages that there should be an actual receipt of income which is not includible in the total income during the relevant previous year for the purpose of disallowing any expenditure incurred in relation to the said income. It was clarified that section 14A will not 5 & 994/PUN/2019 apply if no exempt income is received or receivable during the relevant previous year.
9. This view has been followed in several decisions by this Court. In fact in Pr. CIT v. Man Infraprojects Ltd. [IT Appeal No. 259 of 2017, dated 9-4-2019], this Court followed the decision of the Delhi High Court in Cheminvest Ltd. (supra). It was further noted in MAN Infraprojects Ltd. that the decision of the Delhi High Court was challenged by the revenue before the Supreme Court by fling SLP but the SLP was dismissed.”
Further, we find that issue in the ground of appeal no.1 is covered by the decision of the Co-ordinate Bench of the Tribunal in the case of Quality Industries vs. JCIT vide ITA No.2000/PUN/2014 for A.Y. 2010-11 dated 09.09.2016, wherein, the Tribunal after making a reference to the decision of the Hon’ble Supreme Court in the case of CIT vs. R.M. Chidambaram Pillai, 106 ITR 292 (SC) held that a “firm” and “partnership firm” are not separate unit under the Partnership Act, although a separate unit of assessment for tax purposes after making reference to section 4 of the Indian Partnership Act, 1932. The relevant paragraphs of the decision of the Tribunal (supra) reads as under :- “11.5 As noted, as per the scheme of the Act, the interest paid by the firm and claimed as deduction is simultaneously susceptible to tax in the hands of its respective partners in the same manner. In the same vain, the firm is merely a compendium of its partners and its partners do not have separate legal personalities under the basic law as discussed. The interest paid to partners and simultaneously getting subjected to tax in the hands of its partners is merely in the nature of contra items in the hands of the firms and partners. Consequently interest paid to its partners cannot be treated at par with the other interest payable to outside parties. Thus, in substance, the revenue is not adversely affected at all by the claim of interest on capital employed with the firm by the partnership firm and partners put together. Thus, capital diverted in the mutual funds to generate alleged tax free income does not lead to any loss in revenue by this action of the assessee. In view of the inherent mutuality, when the partnership 6 & 994/PUN/2019 firm and its partners are seen holistically and in a combined manner with costs towards interest eliminated in contra, the investment in mutual funds generating tax free income bears the characteristic of and attributable to its own capital where no disallowance under S. 14A read with Rule 8D is warranted. Consequently, the plea of the assessee is merited in so far as interest attributable to partners. However, the interest payable to parties other than partners, in our view, would be subjected to provisions of Rule 8D(2)(ii) of the Rules. Similarly, in the absence of any specific plea from assessee towards disallowance under Rule 8D(3), we hold it sustainable in view of express mandate of law. The matter is accordingly remanded back to the file of the Assessing Officer for re-computation of disallowance under Rule 8D r.w.s. 14A of the Act in terms of our opinion expressed hereinabove.”
In view of the above settled position of law, we hold that the provisions of section 14A of the Act have no application in the absence of any exempt income. However, in the present case, the interest as received does not indicate that no exempt income is earned. Therefore, we remand the matter to the file of the Assessing Officer with the direction that on verification of books of accounts, if it is found that no exempt income was earned during the previous year relevant to the assessment year under consideration, no disallowance can be made u/s 14A in view of the law laid down in the cases cited (supra). Accordingly, the ground of appeal
no.1 raised by the appellant stands partly allowed.
13. The ground of appeal no.2 challenges the methodology of computation of average value of investments for the purpose of computing the disallowance under limb (iii) of Rule 8D(2) of the Income Tax Rules, 1962 (‘the Rules’).
7 & 994/PUN/2019 14. We heard the rival submissions and perused the material on record. The issue in the present ground of appeal relates to the manner of computation of disallowance under limb (iii) of Rule 8D(2) of the Rules. From reading of the assessment order, it is not clear as to how the Assessing Officer had arrived at average value of investments. Even the ld. CIT(A) had not clearly dealt with as to the manner of computation of disallowance under limb (iii) of Rule 8D(2) of the Rules. Therefore, for the purpose of computing the disallowance under limb (iii) of Rule 8D(2) of the Rules, we restore the matter to the file of the Assessing Officer for the purpose of computing the disallowance under Rule 8D(2)(iii) of the Rules with direction that the amount of disallowance should be computed by considering the value of those investments, which yielded the exempt income alone for the purpose of arriving at average value of investments, in view of the decision of the Hon’ble Delhi High Court in the case of in the case of Joint Investments Pvt. Ltd. vs. CIT, 374 ITR 694 (Delhi), the decisions of Hon’ble Madras High Court in the cases of ACB India Ltd. Vs. Assistant Commissioner of Income Tax, Marg Ltd. Vs. CIT, 318 CTR (Mad.) 148 and CIT Vs. Shriram Ownership Trust 318 CTR (Mad.) 233 and also by the Hon’ble Karnataka High Court in the case of Pragathi Krishna Gramin Bank Vs. Jt.CIT,
95. Taxman.com
41. (Kar.). Thus, the ground of appeal no.2 raised by the appellant stands partly allowed.