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Income Tax Appellate Tribunal, “D” BENCH, MUMBAI
Before: S/SHRI N.K.BILLAIYA & AMARJIT SINGH
आदेश / O R D E R PER AMARJIT SINGH, JM:
The revenue has filed the appeal against the order of learned Commissioner of Income Tax (Appeals)-21, Mumbai [hereinafter referred to as the “learned CIT(A)”] dated 11.12.2012 relevant to the A.Y. 2009-10.
The facts of the case are that the appellant had acquired the assets of Khandesh Mill in 2002-03 by virtue of an order passed by DRT, Aurangabad. The company borrowed funds in year of 2002-03 to acquire all the assets of Khandesh Mills from DRT, Aurangabad. Since then the loan was continued in the books of the company and every year its interest was debited to the books of the company. The company had contributed conditional development rights of Assessment Year: 2009-10 some of these developed lands to certain partnership firms and retained with itself the ownership rights of the said lands. The conditional development rights of some portions of the land so contributed to the firms were reflected in the books of the company as contribution of the company towards its share of capital in the firm. The firms such as Crescent Entertainment & Tourism Ltd., Crescent Residency Pvt. Ltd. and Jalgaon Commercial Spaces had revalued the contribution made by the company in their books of accounts. The capital contribution and revaluation reserve of the partnership firms is as under:
Sr. Investment in Capital Revaluation As at As at No. Contribution Reserve 31/03/09 31/03/08 1 Crescent 20,00,000 39,99,60,000 40,19,60,000 40,19,60,000 Entertainment & Tourism Ltd. 2 Crescent Residency 4,50,000 12,31,83,000 12,36,33,000 -- Pvt. Ltd 3 Jalgaon Commercial 49,50,000 11,43,87,065 11,93,37,065 49,50,000 Spaces TOTAL 74,00,000 63,75,30,065 64,49,30,065 40,69,10,000
Assessing Officer in his assessment order had applied section 14A r.w. Rule 8D and disallowed the expenditure for earning the income which is not part of total income. In the computation of Rule 8D, Assessing Officer had considered the average value of investment based on the revaluation carried out by the partnership firm as value of investment and added under Rule 8D disallowed the expenditure. The assessee filed the appeal before learned CIT(A) who by relying upon the order passed by the Mumbai bench and Kolkata bench cited as under allowed the appeal:
(i) Hitesh Gajaria Appeal No.993/Mum/2007 (ii) Sudhir Kapadia Appeal No.7888/Mum/2003 (iii) Hamid A. Moochhala Appeal No.2218/Mum/2010 (iv) Beharilal Agarwal Appeal No.1816/Kol/2009
Assessment Year: 2009-10 Learned CIT(A) has arrived at this conclusion that section 14A r.w. Rule 8D is not applicable to the present case. However, finding of learned CIT(A) is hereby reproduced for ready reference:
I have considered the facts and circumstances of the case. The appellant in the partnership firms had only contributed the developmental rights from the part of the land purchased through· the Debt recovery proceedings. On this land only appellant had borrowed the loan. The A.O. at the maximum can disallow the expenditure incurred by the appellant only on the amount of investment made by the appellant in the partnership firm not on the revaluation reserve which was created by partnerships after receiving the contribution. Further to the above, ITAT Mumbai held that "in a partnership firm, firm is assessing tax and later based on the share of the partnership which is transferred to the individual partner and individual partner's income is exempt from the tax as the amount is assessed to tax in the partnership firm. Character of the income also does not change. Character of the income in the assessment will be business income and while it is allocated to the partner same characteristics it carries. The exemption provided to the partner is only in order to avoid the double taxation on the same income. The ITAT held as under: "Heard both the parties, perused the material available on record and we find that the issue is covered by the decision of the Tribunal Mumbai Bench in the case of Hitesh D. Gajaria vs. ACIT cited supra, wherein the Hon'ble Tribunal has held as under: "4. We have considered the arguments of the parties and perused the material before us. We find that similar issue was considered by "C" Bench of the Mumbai Tribunal vide order dated 26th February, 2007 in the case of Shri Sudhir Kpadi us. ITO in M/ 03 and the Tribunal dealt with the issue in the following manner: ITAT Mumbai Bench "J" in the case of Sudhir Dettarasm Path vs. DCIT 2 SOT 678 (Mum) has considered the question of taxing the expenditure while computing Income of a partner against salary received by the partner from the firm. The Tribunal held that the salary from the firm in which the assessee is a partner is in the nature of business income u/s.28(v) and therefore, interest paid by the partner on money borrowed for contributing capital has to be allowed as deduction in the hands of the assessee. In respect of the nature of the share in the profits of a firm, in the hands of the partner, the Supreme Court has considered the issue in the case of CIT, Madras vs. RM Chidambaram Pillai 106 ITR 292. The court was examining the nature of share of profits received by a Assessment Year: 2009-10 partner. The court held that a firm is not a legal person even though it has some attributes of personality. In Income Tax Law a firm is a unit of assessment, by Special Provisions, but is not a full person. Since a contract of employment requires two distinct persons, the employer and the employee, there cannot be a contract of service, in strict law, between a firm and one of its partners. Payment of salary to a partner represents a special share of the profits. Salary paid to a partner retains the same character of the income in the firm. The ITAT, Mumbai Bench 'H" in the case of ACIT vs. Rustom J, Gagrat has considered the very same issue for the assessment year 97-98 in its order dated 21/12/04 in M/ 00, there also the Tribunal has held in favour of assessee that deduction is permissible under law.
When we examine the issue in the light of the above judgement and decisions, we find that the claim made by the assessee is acceptable in law. The Supreme Court in the case of CIT Madras, vs. R. M.Chidambaram Pillai has held that salary paid to a partner retains the same character as income of the firm. This leads us to the next step; i.e. the abase of profits received by a partner from the firm retains the same character of business income. The said business income is exempt from the levy of tax only in the hands of the assessee; but it is taxable in the hands of the firm. The assessee partner gets its share of profit from the firm after firm has been subjected to tax in its hands. Therefore, it is not possible to hold the view that the share income in the hands of a partner is all together tax free; on the other hand the share is tax suffered income in the hands of the firm. Therefore, sec.14A is not applicable in that case. The share income of the firm is exempt from the tax u/s.10(2A), not in the absolute sense. It is only to avoid double taxation; once in the hands of the firm and secondly in the hands of the partner. Therefore, we find that the provisions of section 14A would not apply to the assessee/partner and it is not necessary for the Assessing Authority to disallow the proportionate expenditure from the claim of the assessee. Therefore, the disallowance of Rs. 3,09,972/ - is deleted and the Assessing Officer is directed to allow Rs. 3, 95, 500/ - claimed by the assessee. This finding is fortified by the fact that the assessee/partner is not allowed to claim any conveyance expenditure from the firm as provided in the partnership deed.
We find that the issue is also covered in favour of the assessee by the decision of "E" Bench of the Tribunal in the case of Shri Bharat s. Raut in and CO No.212/Mum/2005 vide order dated 25th June, 2008. Thus respectfully following the precedent, we delete the disallowance.”
Assessment Year: 2009-10 4. In view of the above said circumstances we are of the view that the learned CIT(A) has passed the order under challenge on the basis of order passed by the ITAT Mumbai bench and Kolkata bench case cited as under:
(i) Hitesh Gajaria Appeal No.993/Mum/2007 (ii) Sudhir Kapadia Appeal No.7888/Mum/2003 (iii) Hamid A. Moochhala Appeal No.2218/Mum/2010 (iv) Beharilal Agarwal Appeal No.1816/Kol/2009 The facts of the present case are not different to the facts of the case relied by the assessee. Therefore finding no ground to interfere with the order in question we dismissed the present appeal.
In result the appeal of the revenue is hereby dismissed.