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Income Tax Appellate Tribunal, F Bench, Mumbai
Before: Shri Jason P. Boaz & Shri Sandeep Gosain
These three appeals by the assessee are directed against the orders of CIT(A)-1, Thane dated 23.10.2013 for assessment years 2008-09 to 2010-11. These appeals, having interconnected issues, were heard together and are being disposed off by way of this common order. 2. In these appeals, the assessee has raised the following grounds: -
2.1 For A.Y. 2008-09 “1. On the facts and in the circumstances of the case and in law, the assessment order passed u/s 143(3) r.w.s. 153A of the I.T. Act is invalid and bad in law.
2. On the facts and in the circumstances of the case and in law, the, learned CIT(A) erred in sustaining disallowance to the extent of Rs.1,88,704/- made u/s 14A of the I.T. Act. 2.2 For A.Y. 2009-10 “1. On the facts and in the circumstances of the case and in law, the assessment order passed u/s 143(3) r.w.s. 153A of the I.T. Act is invalid and bad in law.
2 Udhavdas Mohandas Rupchandani 2. On the facts and in the circumstances of the case and in law, the, learned CIT(A) erred in sustaining disallowance to the extent of Rs.4,27,477/- made u/s 14A of the I.T. Act.
3. On the facts and in the circumstances of the case and in law, the learned CIT(A) erred in confirming the action of the A.O. in computing the House Property income at Rs.71,400/-.” 2.3 For A.Y. 2010-11 “1. On the facts and in the circumstances of the case and in law, the assessment order passed u/s 143(3) r.w.s. 153A of the I.T. Act is invalid and bad in law.
On the facts and in the circumstances of the case and in law, the, learned CIT(A) erred in sustaining disallowance to the extent of Rs.32,23,598/- made u/s 14A of the I.T. Act.
3. On the facts and in the circumstances of the case and in law, the learned CIT(A) erred in confirming the action of the A.O. in computing the House Property income at Rs.71,400/-.”
At the outset, the learned A.R. for the assessee submitted that only ground No. 2 are being urged in these appeals and all other grounds are not being pressed. In view of this, ground No. 1 for A.Y. 2008-09 to 2010-11 and ground No. 3 for A.Y. 2009-10 and 2010-11 are not pressed and consequently being rendered infructuous are accordingly dismissed.
Ground No. 2 - Disallowance under section 14A of the Act 4.1 The facts of the case on this matter, as emanate from the record, are that the assessee is a partner in firms from where he derives share of profit which is exempt under section 10(2A) of the Income Tax Act, 1961 (in short 'the Act') in addition to interest income and remuneration. The assessee had borrowed funds, which he has invested in the capital of firms, whereon he pays interest and also earns interest on such investment in capital of firms. The assessee submitted that the interest earned from investment in capital of firms and remuneration received were both exigible to tax as business income under section 28(v) of the Act and that interest paid on borrowed funds were allowable as deduction therefrom. The AO did not accept the assessee’s claim as he was of the view that the main objective of the assessee for being a partner in the firm was to earn share of profits as partner therefrom which are exempt under section 10(2A) of the Act. The AO was also of the view that, since it is difficult to establish the nexus of 3 Udhavdas Mohandas Rupchandani borrowed funds invested in the firms with that of taxable or non-taxable income, the provisions of section 14A of the Act were attracted and proceeded to compute disallowance under section 14A read with Rule 8D for the three assessment years n appeal as under: - Assessment Year 2008-09 Rule 8D(2)(i) Nil Rule 8D(2)(ii) `22,93,341/- Rule 8D(2)(iii) `1,88,704/- Assessment Year 2009-10 Rule 8D(2)(i) Nil Rule 8D(2)(ii) `47,98,428/- `4,27,477/- Rule 8D(2)(iii) Assessment Year 2010-11 Rule 8D(2)(i) Nil Rule 8D(2)(ii) `95,13,560/- Rule 8D(2)(iii) `5,56,860/- 4.2 On appeal before the learned CIT(A), the assessee, inter alia, contended that the provisions of section 14A of the Act were not applicable in the case on hand since (i) no expenses had been incurred for earning of share of profits from the firms, exempted under section 10(2A) of the Act. In support of the proposition, that since no portion of the interest expenditure, sought to be disallowed under section 14A, relates to share in profits from the firms exempt under section 10(2A) of the Act, no disallowance is to be made, the assessee placed reliance on the decision of the Coordinate Bench in the case of Delite Enterprises (P) Ltd. (2011) 134 TTJ (Mum) 663 which has been affirmed by the Hon'ble Bombay High Court in ITA No. 110 of 2009 dated 26.09.2009. And (ii), the assessee also submitted that interest expenditure on borrowed funds was relatable to interest income from funds that have been invested as unsecured loans in various companies, interest earned on capital invested in the firms and remuneration received from firms, constituting business income under section 28(v) of the Act. In support of this proposition, the assessee placed reliance on the decision of 4 Udhavdas Mohandas Rupchandani the Coordinate Bench of this Tribunal in the case of Delite Enterprises (supra). In support of the proposition that interest on borrowed capital for the purpose of investment in firms is allowable against remuneration received by the partner from the firms, the assessee placed reliance on the decision of a Coordinate Bench of this Tribunal in the case of Sudhir Dattaram, Patil vs. DCIT (2005) 2 SOT 678 (Mum).
4.3 The learned CIT(A), was of the view that when funds were borrowed and invested in firms as capital/loan, it was only related to the interest paid on such borrowed funds and interest earned from the firms dehors the share in the profits of a firm; i.e. interest paid had a direct relation with interest income and was not related to the assessee’s share in the profits from firms. The learned CIT(A) consequently held that no disallowance could be made out of interest expenditure on borrowed funds invested in the firms to the extent of interest earned from investment in such firms. In this view of the matter, the learned CIT(A) recomputed and deleted/reduced the disallowance made by the AO under section 14A read with Rule 8D(2)(ii) as under: -
Disallowance Disallowance Deleted/ Disallowance A.Y. (`) Reduced (`) Confirmed (`) 2008-09 22,93,341/- 22,93,341/- Nil 2009-10 47,98,428/- 47,98,428/- Nil 2010-11 95,13,560/- 68,46,822/- 26,66,738/-
The assessee’s appeal in respect of the disallowance under section 14A read with Rule 8D(2)(ii) therefore is only with respect to the disallowance thereunder sustained to the extent of `26,66,738/- for A.Y. 2010-11.
4.2.2 The learned CIT(A) upheld the disallowance made by the Assessing Officer under section 14A read with Rule 8D(2)(iii) for all three assessment years 2008-09 to 2010-11 as laid out at para 4.1 of this order (supra). This is the subject matter of the appeals for all the three years involved.
4.3.1 We have heard the learned A.R. for the assessee at length in the matter of disallowance under section 14A read with Rule 8D(2)(ii) reiterating
5 Udhavdas Mohandas Rupchandani the submission put forth before the learned CIT(A) and as summarised by us at para 4.2 of this order (supra). Accordig to the learned A.R. for the assessee, the disallowance of `26,66,738/- sustained by the learned CIT(A) under section 14A read with Rule 8D(2)(ii) was not called for for A.Y. 2010- 11 as it was to be made only in respect of exempt income earned. Therefore, since apart from interest income from investments in loans and capital accounts of firms, the assessee has also received remuneration from firms which was exigible to tax as business income under section 28(v) of the Act and therefore interest on borrowed capital ought to be allowable against such remuneration received from firms in view of the decision of the Coordinate Benches in the case of Sudhir Dattaram Patil (supra) and Delite Enterprises (supra). The learned D.R. on his part placed reliance on the findings in the impugned order. 4.3.2 We have heard the rival submissions and perused and carefully considered the material on record on record; including the judicial pronouncements cited and relied upon. The matter for adjudication before us is with respect to the disallowance under section 14A read with Rule 8D(2)(ii) of `26,66,738/- for A.Y. 2010-11 only. A plain reading of section 14A of the Act indicates that if the disallowance is to be made, it is to be in respect of that expenditure incurred in relation to income not includible in total income. In these factual and legal circumstances of the case on hand, we are of the considered opinion that while working out the disallowance under section 14A read with Rule 8D(2)(ii), the authorities below ought to have allowed interest on borrowed capital for the purpose of investment in firms against remuneration of `80,00,000/- received by the partner from the firms which was exigible to tax under section 28(v) of the Act, as has been held by the Coordinate Bench in the case of Sudhir Dattaram Patil (supra). If this exercise had been carried out, and the balance interest of `26,66,738/- had been set off against the remuneration of `80,00,000/- no disallowance under section 14A read with Rule 8D(2)(ii) would have been called for. Following the decision of the Coordinate Bench of this Tribunal in the case of Sudhir Dattaram Patil (supra), we delete the disallowance of `26,66,738/- made/confirmed under section 14A read with Rule 8D(2)(ii) in the impugned
6 Udhavdas Mohandas Rupchandani order. Accordingly, the assessee’s appeal for A.Y. 2010-11 is allowed on this issue of disallowance under section 14A read with Rule 8D(2)(ii). 4.4.1 In respect of the disallowance under section 14A read with Rule 8D(2)(iii) made by the AO and sustained by the learned CIT(A) for A.Y. 2008- 09 (viz. `1,88,704/-), for A.Y. 2009-10 (viz. `4,27,477/-) and for A.Y. 2010- 11 (`5,56,860/-), the learned A.R. for the assessee submitted that no disallowance under section 14A was called for as the share of profits received by the assessee from firms, which was exempt under section 10(2A) of the Act was received by the assessee only after all expenditures incurred in earning the said profit had been debited and taxes thereon had been paid. Per contra, the learned D.R. supported the impugned order of the learned CIT(A). 4.4.2 We have heard the rival contentions and perused and carefully considered the material on record, including the judicial pronouncements cited. The AO has computed the disallowance under section ½% on the average investment as on the opening balance and closing balance of investments of the relevant period. The authorities below were of the view that the assessee’s main intention of taking loan bearing funds and investing them in the loans and capital with firms is to earn share of profits which were exempt under section 10(2A) of the Act in the hands of the assessee. On the contrary, the assessee contends that there is no nexus at all between the interest paid on borrowed funds and the earning of exempt share of profits from firms and therefore no disallowance is called for under Rule 8D(2)(iii). We find that, as observed by the learned CIT(A), while interest expenditure has been incurred on funds invested in the capital of firms from where the assessee has received both taxable income in the form of interest income and remuneration, the assessee would have also incurred certain other expenses like brokerage, bank charges, vehicle expenses, depreciation thereon, etc. for earning such exempt income and therefore some disallowance would be called for under section 14A of the Act, though not as exactly laid out by the AO. In the factual matrix of the matter, as discussed above, we deem it reasonable to restrict the disallowance under Rule 8D(2)(iii) on an adhoc basis as under: -
7 Udhavdas Mohandas Rupchandani Disallowance Disallowance S. No. A.Y. made by AO (`) Sustained (`) 1 2008-09 1,88,704/- 1,80,000/- 2 2009-10 4,72,477/- 3,00,000/- 3 2010-11 5,56,860/- 3,50,000/-
It is accordingly ordered. Consequently the assessee’s appeal on this issue is partly allowed. 5. In the result, assessee’s appeals for A.Y. 2008-09 to 2010-11 are partly allowed.
Order pronounced in the open court on 30th March, 2016.