MINT PROPERTIES PVT LTD.,CHENNAI vs. ITO CORPORATE WARD 4(1), CHENNAI

आदेश / O R D E R PER G. MANJUNATHA, AM: This appeal filed by the assessee is directed against the order

of the learned CIT(Appeals)-8, Chennai dated 06.02.2019 and

pertains to assessment year 2015-16.

2 ITA No.1018/Chny/2019

advanced to various parties for interest and such interest of Rs. 27,62,380/- was offered for tax as income. 4. The appellant submits that there is a direct nexus between the borrowals and advances/loans given and therefore the interest paid has to be adjusted against the interest received and offered for tax. 5 The appellant submits that no part of the borrowed funds were invested in the firms and in fact the appellant has become a partner in various firms in 2002- 2008 whereas the borrowals were made only in the year 2013. 6 The learned Commissioner of Income-tax (Appeals) erred in observing that the borrowed funds were mixed with the common funds and therefore it cannot be said that borrowed funds were not used for investment in the firms when the borrowed funds were directly given as loans to others on interest as evidenced from the bank statements submitted, 7. The Assessing officer is not justified in making the disallowance of Rs. 7,66.662/- under section 14A r/w Rule 8D(2)(iii). 8. The appellant submits that none of the expenses claimed can be attributable to earning of exempted share income from the firms and the appellant had not incurred any expenditure for investment in the firms to get any exempted income. 9. The appellant submits that the provisions of section l4A cannot be applied to share income from the firms as tax has been paid by the firm and he other income received by the partner as interest and remuneration from the firms are taxed in the bands of the partners. The share in profit of the firm which has suffered tax in the hands of the firm is therefore not an income which does not form part of total income for making the disallowance u/s 14A of the Act. 10. The appellant therefore prays that the disallowance of Rs,16,23,470/- made under section 14A may be deleted and justice rendered.”

engaged in the business of development of property filed its return

3 ITA No.1018/Chny/2019 of income for the assessment year 2015-16 on 28.10.2015 declaring total income of ` 34,15,840/-.The case was selected for

scrutiny and during the course of assessment proceedings, the

Assessing Officer noticed that assessee has earned exempt income being share of profit from partnership firm, whereas not disallowed expenditure incurred in relation to income which do not

form part of total income under the Income Tax Act, 1961 (hereinafter referred to as “the Act”), therefore, called upon the assessee to explain as to why disallowances contemplated under

section 14A of the Act shall not be disallowed in accordance with Rule 8D of the Income Tax Rules, 1962. In response, the assessee submitted that the assessee has not incurred any expenditure in relation to exempt income and further share of profit from

partnership firm cannot be equated with dividend income which is exempt u/s.10(34) of the Act to make disallowance of expenditure in relation to such income. The Assessing Officer was not however,

convinced with explanation furnished by the assessee and according to him, as per sub-section (2) and (3) of section 14A, disallowances contemplated under section 14A shall be determined

in accordance with prescribed formula provided under Rule 8D and accordingly computed disallowance under Rule 8D(2)(ii) towards

4 ITA No.1018/Chny/2019 interest expenditure of `8,56,808/- and made further disallowance of `7,66,662/- under Rule 8D(2)(iii) @ 0.5% of average value of investments and thus, made total disallowance of ` 16,23,470/- and

added back to the total income. The Assessing Officer has also made similar additions to book profit computed u/s.115JB of the Act towards disallowance u/s.14A of the Act.

5 ITA No.1018/Chny/2019 5. The learned AR for the assessee submitted that the learned

CIT(A) has erred in confirming the additions made by the

Assessing Officer towards disallowance of expenditure including

interest under Rule 8D(2) (ii) & (iii) ignoring the fact that assessee

has not incurred any interest expenditure towards investment in

partnership firm and consequently no disallowance can be made

towards interest paid on loans, which was specifically borrowed for

the purpose of business. The learned AR further submitted that if at

all interest disallowance is to be made, only net interest expenditure

needs to be considered as held by the Hon’ble Gujarat High Court

in the case of PCIT Vs. Nirma Credit & Capital P.Ltd. in T.C.Appeal

No.409 & 514 of 2017 vide order dated 31.08.2017. Further, if net

interest expenditure is considered, interest expenditure incurred by

the assessee is less than interest income earned for the year and

hence, there cannot be any disallowance towards interest

expenditure. As regards other expenses, the Assessing Officer has

failed to make out a case of any specific expenditure which is

having direct nexus to exempt income and therefore, even under

Rule 8D(2)(iii), no disallowance can be made.

6 ITA No.1018/Chny/2019 6. The learned DR, on the other hand, supporting the order of the

learned CIT(A) submitted that from the assessment year 2008-09

onwards disallowances contemplated u/s.14Ashall be computed in

accordance with Rule 8D, where a procedure has been provided

and hence the Assessing Officer has no discretionary role to

compute disallowance ignoring specific provisions provided under

the Act. Therefore, there is no merit the arguments of the assessee

that no disallowance can be made towards interest expenditure

and other expenses.

available on record and gone through the orders of the authorities

below along with the case laws cited by the learned counsel for the

assessee . There is no dispute with regard to the fact that assessee

has earned exempt income being share of profit from the

partnership firm which is exempt u/s.10(2A) of the Act. Therefore,

once there is exempt income which do not form part of the total

income under the Act, then disallowance of expenditure in respect of

said income required to be computed u/s.14A, read with Rule 8D of

IT Rules,1962. Therefore, we are of the considered view that there

is no merit in the arguments of the assessee that provisions of

7 ITA No.1018/Chny/2019 section 14A has no application to exempt income being share of

profit from partnership firm. As regards disallowance of interest

expenditure, although the Assessing Officer has adopted Rule

8D(2)(ii) of IT Rules, 1962 to determine interest disallowance, but

fact remains that for the year under consideration interest paid by

the assessee is less than interest income earned for the year. It is

well settled principle of law that for the purpose of applying clause

(ii) of Rule 8D prior to its amendment w.e.f 02.06.2016, amount of

expenditure by way of interest would be interest paid by the

assessee on borrowings less taxable interest earned during the

financial year. This view is fortified by the decision of Hon’ble

Gujarat High Court in the case of PCIT Vs. Nirma Credit & Capital

P.Ltd, where the Hon’ble Court held that only net interest expenses

is to be considered for the purpose of making disallowance

u/s.14Aof the Act. In this case, interest paid is less than interest

earned for the year. Therefore, we direct the Assessing Officer to

delete the additions made towards interest expenses under Rule

8D(2)(ii) of IT Rules, 1962. As regards disallowance of other

expenses under Rule 8D(2)(iii) @ 0.5% of average value of

investments, law is very clear inasmuch as there is no scope for

Assessing Officer to go for ad-hoc disallowance, when assessee

8 ITA No.1018/Chny/2019 has not maintained separate books of account for investments

activity and business. When there is no separate books of account

for both activities common expenditure relatable to investment

activity and business activity has to be allocated on a systematic

basis for which a separate method is prescribed under Rule 8D of

IT Rules, 1962. In this case, the Assessing Officer has applied

method provided under Rue 8D(2) (iii) @ 0.5% of average value of

investments to compute disallowance of other expenses. We do not

find any error in the findings recorded by the authorities below,

which is in accordance with law and hence, we are inclined to

uphold the order of the learned CIT(A) and reject the grounds

taken by the assessee in respect of disallowance of other expenses

under Rule 8D(2)(iii) of IT Rules, 1962.

Sd/- Sd/- (वी. दुगा� राव) (जी. मंजुनाथ) (V.Durga Rao) (G.Manjunatha) #या�यक सद%य /Judicial Member लेखा सद%य / Accountant Member

चे#नई/Chennai, (दनांक/Dated 31st December, 2020 DS आदेश क� ��त*ल+प अ,े+षत/Copy to: 1. Appellant 2. Respondent 3. आयकर आयु-त (अपील)/CIT(A) 4. आयकर आयु-त/CIT 5. +वभागीय ��त�न1ध/DR 6. गाड� फाईल/G