2023 (8) TMI 1520 - AT - Income Tax

Revision u/s 263 - disallowance u/s 14 is required to be made in respect of interest paid/ credited on the partners capital account bank interest - as argued interest on partners capital account being allocation of profit is a revenue neutral transaction and it is not an expenditure of interest paid on capital borrowed for the purpose of business - HELD THAT - When the PCIT has taken a conscious view on this issue then it cannot be said that any mistake apparent on record has crept in the order passed by her u/s 263 of the Act more particularly when there are number of decisions as mentioned hereinabove wherein it was held that interest paid on the capital account of the partners cannot be considered for disallowance u/s 14A of the Act. Therefore, in the case of ITO vs Volkart Brothers and Others 1971 (8) TMI 3 - SUPREME COURT wherein it is held that an error which has to be established by a long-drawn process of reasoning on points where there may conceivably be two opinions cannot be said to be an error apparent on the face of the record. A decision on debatable point of law is not a mistake apparent from the record. We also noted that decision of case of Munjal Sales Corporation (supra) 2008 (2) TMI 19 - SUPREME COURT relied upon by the ld. PCIT is not applicable inasmuch as the assessment year involved in this decision are assessment year 1993-94 to 1997-98 whereas Section 14A was introduced in the Statute by Finance Act 2001. Hon ble ITAT, Jaipur Bench in case of ASK Partners 2019 (1) TMI 877 - ITAT JAIPUR has also held that payment of interest to the partners as per the provision of partnership deed is not subject to disallowance u/s 14A read with Rule 8D(ii) of the Act. Thus when the PCIT has taken a view and that view is in accordance with the decision of Hon ble ITAT Pune Bench and Jaipur Bench, it cannot be said that there is any mistake apparent on record. Assessee appeal allowed.

Summary

Issues:
- Whether the order passed by the ld. PCIT under Section 154 r.w.s. 263 of the I.T. Act on an issue already discussed and declared in a previous order is illegal and beyond the scope of Section 154.
- Whether disallowance under Section 14A is required to be made in respect of interest paid on partners' capital account and bank interest.
- Whether interest on partners' capital account is a revenue neutral transaction and not an expenditure for the purpose of business.

Analysis:

1. The appellant challenged the order of the ld. PCIT under Section 154 r.w.s. 263 of the Act. The PCIT had initially discussed the issue of disallowance under Section 14A in their previous order. The PCIT later issued a notice stating that interest paid to partners should be considered for disallowance under Section 14A. The appellant argued that the PCIT's change in opinion was not a mistake apparent on record but a change of view. The appellant relied on various case laws to support their argument.

2. During the hearing, the ld. PCIT defended their order, stating that interest paid to partners should be considered for disallowance under Section 14A. The Tribunal examined the materials on record and noted that the PCIT had already deliberated on the issue in the previous order. The Tribunal found that the PCIT's decision was not a mistake apparent on record, especially considering the various legal precedents cited by the appellant.

3. The Tribunal further analyzed the applicability of the decision in the case of Munjal Sales Corporation vs. CIT, cited by the PCIT. The Tribunal concluded that the decision in that case was not directly relevant to the present matter, as it pertained to different assessment years and sections of the Act. Additionally, the Tribunal referenced decisions from ITAT Pune and Jaipur Benches, which supported the appellant's argument that interest paid to partners should not be subject to disallowance under Section 14A.

4. Citing legal principles from various Supreme Court cases, the Tribunal emphasized that a debatable point of law does not constitute a mistake apparent on record. The Tribunal found that the PCIT's order did not reflect an obvious error and that the issue of interest paid to partners had been adequately considered in the previous order. Therefore, the Tribunal allowed the appeal of the assessee, disagreeing with the findings of the ld. PCIT.

5. Consequently, the Tribunal allowed the appeal of the assessee, ruling in favor of their argument regarding the treatment of interest paid on partners' capital account. The order was pronounced in the Open Court on 30/08/2023.