SH. VISHAL GARG,LUDHIANA vs. ITO, W-1(3), LUDHIANA

आदेश/Order PER ANNAPURNA GUPTA, A.M. : The present appeal has been filed by the assessee against the order of the Commissioner of Income Tax (Appeals)-1, Ludhiana (in short CIT(A) dated 1.11.2017 passed u/s 143(3) of the Income Tax Act, 1961 (in short referred to as ‘Act’).

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from share of profit and interest from the partnership firm

during the impugned year. The profit earned by the assessee

from the partnership firm amounted to Rs.28,56,630/- which

was claimed as exempt under the provisions of section

10(2A) of the Act , while the interest earned amounted to

Rs.26,41,618/- which was returned to tax. Against the said

interest earned the assessee had claimed deduction on

account of interest paid on unsecured loans taken

amounting to Rs.12,66,205/-, as per the provisions of

section 36(1)(iii) of the Act on the premises that the interest

income from the partnership firm was taxable as business

income within the meaning of section of section 28(v) of the

Act. The A.O. while framing the assessment invoked the

provisions of section 14A of the Act r.w.r.8D of the Income

Tax Rules, 1962 and disallowed the interest expenses of

Rs.12,66,205/- holding the same to have been incurred for

the purpose of earning the exempt income of share of profit

from the partnership firm.

who upheld the order of the A.O.

appeal before us, raising the following effective grounds of

appeal:

"That the Ld. CTT(A)-1, Ludhiana erred in law & facts in confirming “2. disallowance u/s 14A read win Rule 8D of the Income Tax Act, 1961 to the tune of 1% of the annual average of the monthly averages of the opening and closing balances of the capital investment in the Partnership Firm without any base and reasons thereof.

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2.1 That the Ld. CIT(A)-1, Ludhiana erred in law and facts partly confirming disallowance u/s 14A of the Income Tax Act, 1961 without appreciating that A.O. failed to record a satisfaction based on examination of accounts with regard to correctness of claim of the assessee with respect to expenditure in relation to "exempt income, without any base &. reasons thereof. 2.2 That the Ld. CIT(A)-1, Ludhiana failed to appreciate that provisions of section 14A are not applicable on the investment in a Partnership Firm without any base & reasons thereof. 2.3 That the Ld. CIT(A)-1, Ludhiana failed to appreciate that the Hon'ble ITAT Chandigarh in a binding precedent has held interest paid on borrower capital has no close proximity with the exempt profit whereas it has close proximity with interest earned which is taxable u/s 28. Accordingly no disallowance u/s 14A is called for with respect to interest income. 2.4 That the Ld. CIT(A)-1, Ludhiana has failed to appreciate that the amendment in Rule 8D with effect from 02.06.2016 is prospective and not retrospective. Accordingly no disallowance can be made based upon amended provisions of Rule 8D of the Income Tax Rules. 2.5 That no disallowance can be made as per pre-amended 8D(2)(ii) since interest income is much more than expenditure. 2.6 That no disallowance of interest can be made under Rule 8D(2)(iii) particularly when there is a separate sub-clause in Rule 8D(2). Further that disallowance under Rule 8D(3) cannot exceed the expenditure other than interest, which is Nil.” 6. Taking up first ground No.2.1 raised by the assessee

before us the Ld. counsel for assessee contended that while

making disallowance u/s 14A the A.O. was required to

record satisfaction as to why he was not satisfied with the

claim of the assessee that no expenditure had been incurred

in relation to the exempt income earned. The Ld. counsel

for assessee contended that under sub-section (2) of section

14A of the Act the A.O. was required to examine the

accounts of the assessee and only when he was not satisfied

with the correctness of the claim in respect of the

expenditure in respect of the exempt income, he could

have resorted to the prescribed method for determining the

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amount of expenditure disallowable u/s 14A of the Act,

which was rule 8D of the Income Tax Rules. Reliance was

placed on the following decisions of the Hon'ble High Courts

and the I.T.A.T. in support of the contention of the

assessee:

1) ACIT Vs. M/s Avon Cycles Ltd., ITA No.931/Chd/2013

2) CIT-I, Ludhiana Vs. Abhishek Industries Ltd. (2005) 56 Taxmann.com 391 (P&H)

3) M/s Anshul Goyal Land & Housing Ltd. Vs. DCIT ITA No.1428/Chd/2017

4) CIT-II Vs. Her Cycles Ltd. (2010) 189 Taxman 50 (P&H)

5) CIT, Jalandhar-I Vs. Deepak Mittal (2013) 38 Taxmann.com 83 (P&H) 7. The Ld. DR contended that the said issue had not

been raised before the CIT(A) and, therefore, had not been

dealt with by him also. It was, therefore, pleaded that the

matter be restored back to the CIT(A) to adjudicate first on

the issue of recording of satisfaction prior to making

disallowance u/s 14A of the Act.

orders of the authorities below. The issue in challenge

before us is the disallowance of expenses made u/s 14A of

the Act. Undoubtedly the proposition of law laid down by

courts in various decisions, as cited by the Ld.Counsel for

the assessee, is that the satisfaction of the A.O. vis-a-vis

the incorrectness of the claim of the assessee is an

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essential prerequisite for invoking the provisions of section 14A. This issue needs to be looked into and adjudicated upon before deciding the same on merits. In the present case, admittedly this aspect /issue has been raised for the first time before us and has thus remained unexamined and unadjudicated by the CIT(A). Since adjudicating the same will require examining the facts of the case and considering the plea of the parties we consider it fit to restore the appeal denovo to the CIT(A) to first adjudicate the issue of existence of satisfaction of the A.O. vis-a-vis the incorrectness of the claim of the assessee and thereafter decide the appeal in accordance with law. The CIT(A) is directed to pass a speaking order after giving due opportunity of hearing to the assessee in this regard.

Order pronounced in the Open Court.

Sd/- Sd/- �दवा �संह अ�नपणा� ग�ता (ANNAPURNA GUPTA) (DIVA SINGH) �याय�क सद�य/ Judicial Member लेखा सद�य/ Accountant Member �दनांक /Dated: 31st October, 2018 *रती* आदेश क� ��त�ल�प अ�े�षत/ Copy of the order forwarded to :

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आदेशानसार / By order, सहायक पंजीकार/ Assistant Registrar