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Income Tax Appellate Tribunal, “D” BENCH, MUMBAI
Before: SHRI SHAMIM YAHYA, AM & SHRI AMARJIT SINGH, JM
O R D E R Per Shamim Yahya, A. M.:
This appeal by the assessee is directed against the order of the learned Commissioner of Income Tax (Appeals)-38, Mumbai (‘ld.CIT(A) for short) dated 30.01.2017 and pertains to the assessment year (A.Y.) 2011-12.
The grounds of appeal read as under:
I. Disallowance of proportionate interest paid and Car expenditure U/S.14A ofincome tax Act, read with Rule 8D amounting to Rs.20,40,331/-is bad in law. ; 1. The Learned CIT(A) failed to appreciate that, against the interest paid of Rs.43,75,573/- on borrowed money assessee has earned taxable interest of Rs.63,75,573/- hence as the borrowed money was not invested for earning exempt income no disallowance can be made u/s 14A of the income tax -Act., hence addition ,r: of Rs 20,40,331/- confirmed by the CIT(A) may be deleted.
2. The Learned CIT(A) failed to appreciate that the Car expenses of amounting to Rs.81,833/- cannot be apportioned for expenses relating to exempt income, hence addition confirmed by the CIT(A) may be deleted.
3. Without prejudice to above, no expenditure was incurred by the assessee for earning share of profit from the firm and no disallowance can be made u/s 14A in respect of share of profit from the firm.
Brief facts of the case are as under:
During the course of assessment proceedings, the Assessing Officer (A.O. for short) observed that the assessee has earned exempt share profit income of Rs.61,26,266/- from firms which includes Rs.23,607/- from M.R. Shelter, Rs.50,24,841 /- from Neeta Developers and Rs.78,818/- from Universal Housing Corporation besides taxable income of Rs.71,73,799/-. Against the aforesaid income, the assessee claimed deduction of Rs.43,47,707/- on account of interest payments.
During the course of assessment proceedings, the A. O. asked the assessee to justify its claim of deduction of the aforesaid interest payment, in response to which the assessee submitted that loans taken were invested for business purpose to earn income and the interest paid on such loan be allowed as expenditure incurred for earning the business income.
Regarding the allowability of interest payment against exempt share income from firms, the ld. Counsel of the assessee submitted that the share of profit is exempt in the hands of the partners as total profit is taxed in the hands of the firm and therefore it is not taxed again in the hands of the partner.
The A.O. considered the submissions of the assessee and held that the assessee has claimed deduction on account of interests paid on loans taken from the interest and remuneration received from partnership firms claiming that the loans were invested in partnership firms, in which he is a partner and had simultaneously earned exempt share income of Rs.61,26,266/- frorn the same partnership firms. The contention of the assessee is that no interest should be disallowed in respect of exempt income as the share profit is not exempt as tax has been paid on profits by the firms and share income is the share of profit after payment of tax. As regards the question as to whether any disallowance is required to be made u/s.14 A in respect of exempt share profit earned by the assessee, the AO referred to the decision of Ahmedabad Special Bench of ITAT in the case of Shri Vishnu Anant Mahajan vs. Asstt. Commission of Income Tax (ITA No. 3002/Ahd/2009) wherein it was held that "the firm is translucent vehicle under the Act and a firm and its partners are assessable separately on their total income in their names, notwithstanding the position in partnership act that the firm is a compendium or a collective name of the partners".
Further, the A.O. referred to the provisions of the section 10(2A) and stated that the firm and partners are separately assessable entities; it would be difficult to hold that the share of income is not excluded from the total income of the partners. Thereafter, the A.O. referred to the proviso of section 14A stating that for such kind of situations section 14A will come into operation and any expenditure incurred in earning the share from partnership firm will have to be disallowed. In view of the above facts and judicial pronouncement, the A.O. made proportionate disallowance of interest and car expenses amounting to Rs.20,40,331 /-and added back to the total income of the assessee.
In view of the above aforesaid additions of Rs.20,40,331/-, the assessee has filed the present appeal.
Against the above order, the assessee is in appeal before the ld. CIT(A).
The ld. CIT(A) noted the submission of the assessee as under: 3.1 During the course of appellate proceedings, the appellant submitted that he has earned income of Rs.1,33,00,065/- drawn from different firms, wherein he is a partner
and out of the aforesaid income, Rs.61,26,266/-was the share of profit earned by him. U was further contended that the share income earned from the firms; is taxed in the hands of the firms but exempt in the hands of the partners. 3.2 The appellant submitted that the whole purpose of insertion of section 14A was to disallow expenditure that had been incurred in relation to earning of income which did not form part of total income under the act. Emphasis of the section is to disallow expenditure incurred on earning exempt income. In the appellant's case, the share of profit which is received by him is not taxable in his hands as it was already subjected to tax in the hands of firm. The appellant contended that therefore, to avoid taxing the same income twice, the share of profit received by the partners is exempted from tax and is accordingly not hit by the provision of sections 14A so as to make any disallowance. 3.3 Further it was contended that the assessee has obtained loans on interest from various parties, which were invested in various business ventures including the firms and that on these loans, he has earned at total interest income of Rs.63,75,573/- and paid interest on these borrowed loans amounting to Rs,43,47,707/-. It was further submitted that the entire borrowings have not been utilised towards partnership firms and therefore interest on such borrowings cannot be subject matter of disallowance under section 14A. 3.4 It was contended that the interest earned from partnership firms have direct nexus in interest paid on borrowings made and disbursed to partnership firm and therefore no interest can be disallowed under section 14A. 3.5 As regards the disallowance made by the AO under section 14A in respect of car expenses of Rs.81,833/-, the appellant, submitted that the Motor car was used for tin- purpose of business of the firm and has no relation to the share of profit from partnership firm, hence cannot be considered for disallowance u/s. 1 4A of the Act.
However, the ld. CIT(A) was not convinced. He proceeded to place reliance upon the decision of Ahmedabad Special Bench in the case of Shri Vishnu Anant Mahajan vs. Asst. CIT (in and concluded as under:
4.8 In view of the decision rendered by Ahmedabad Special Bench, the partners share of profits will be considered as an income which does not form part of total income for the purpose of section 14A. Thus, in view of the above facts and judicial pronouncements, I am of the view that the provision contained in section 14A are applicable to the facts of the case and the disallowance made by the A.O. amounting to Rs.20,40,331/- is upheld.
Against the above order, the assessee is in appeal before us.
We have heard both the counsel and perused the records. The ld. Counsel of the assessee submitted that the authorities below have not understood the facts of the case.
That they have not appreciated the submissions in the factual details submitted by the assessee. He submitted that the authorities below have only considered the Ahmedabad Special Bench in the case of Shri Vishnu Anant Mahajan (supra) as above and disallowed the claim of the assessee. The ld. Counsel of the assessee pleaded that the said decision is not at all applicable on the facts of this case. He referred to the paper book submitted in this regard. He submitted that assessee has paid interest of Rs.43,75,573/- on borrowed money but has earned taxable interest of Rs.63,75,573/- as interest on current capital in partnership. He further claimed that no borrowed money was utilized in earning exempt income. He submitted that the A.O. has not examined the factual details. He pleaded that the issue may be remitted to the file of the A.O. to examine the factual details. He also referred to the decision of the ITAT, Mumbai Bench in the case of ACIT vs. Shri Arunbhai Chimanlal Shah (in vide order dated 01.05.2015). He pleaded that the said decision supports the case of the assessee.
Per contra, the ld. Departmental Representative (ld. DR for short) submitted that on the facts and circumstances of the case, the matter may be remitted to the file of the A.O. to examine the factual details.
Upon careful consideration, we find that in this case, assessee has earned income from partnership firm which is exempt from tax. Assessing Officer has noted that assessee has incurred expenditure in connection with earning of this exempt income and hence he has made the disallowance. In this regard, authorities below have also placed reliance upon the by the special bench decision referred above.
Per contra, learned counsel of the assessee, pleaded that authorities below have not properly understood the facts of the case. He submitted that assessee has much more interest income earned on its capital account which is subject to tax than the interest paid. He further submitted that considerable less amount of borrowed funds were used for investment in partnership firms. Further, assessee’s counsel pleaded that there are decision from ITAT Mumbai in favour of assessee. In these circumstances both the counsels have fairly agreed that the matter may be remitted to the file of Assessing Officer to factually examine the submissions by the assessee. Accordingly, in the interest of justice, we remit the issue the file of the Assessing Officer. Assessing Officer is directed to factually examine the case in view of the submissions made by the learned counsel of the assessee. Needless to add the assessee should be granted adequate opportunity of being heard.
In the result, this appeal by the assessee is allowed for statistical purposes.
Oder pronounced in the open court on 23 /04/2019