2017 (4) TMI 967 - AT - Income Tax

Addition u/s 14A - Interest payment made by the partnership firm to the partners - Held that - Interest expenditure incurred by the partnership firm on account of interest paid to the partners cannot be disallowed under provisions of section 14A of the Act. Decided in favour of the assessee It is found that the assessee had made investment in real estate funds and guilt funds. Income arising from such investments could be taxable. Hence same should not have been considered for computing the disallowance u/s. 14A.We find that AO/FAA has not made proper investigation in that matter. Therefore, in the interest of Justice, we are restoring that the issue to the file of the AO for fresh adjudication. He is directed to afford a reasonable opportunity of hearing to the assessee. The assessee-firm would produce the documents related to taxable generating funds.

Summary

Issues Involved:
1. Disallowance under Section 14A of the Income Tax Act.
2. Interest expenditure incurred by the partnership firm on account of interest paid to partners.
3. Investment in real estate and guilt funds and its taxability.

Issue-wise Detailed Analysis:

1. Disallowance under Section 14A of the Income Tax Act:
The primary issue in the appeal was the disallowance made by the Assessing Officer (AO) under Section 14A of the Income Tax Act, amounting to ?41.68 lakhs. The AO found that the assessee had received dividend income and long-term capital gains, claiming exemptions under Sections 10(34) and 10(38) respectively. The AO applied the provisions of Section 14A read with Rule 8D(ii) of the Income Tax Rules, 1962, disallowing ?38.78 lakhs under interest expenditure and 0.5% of the average value of investment amounting to ?1.78 lakhs.

2. Interest Expenditure Incurred by the Partnership Firm on Account of Interest Paid to Partners:
The assessee argued that the interest paid to partners was not an expenditure but a distribution of profits as per Section 40(b) of the Act. The assessee contended that it had sufficient funds to make investments and relied on several case laws, including Sudhir Kapadia, Sudhir Dattaram Pathe, Bharat S Raut, and Bihari Lal Aggarwal. The First Appellate Authority (FAA) upheld the AO's disallowance, distinguishing the cases cited by the assessee and stating that the firm did not have interest-free funds available for making investments. The Tribunal, however, referred to the case of Quality Industries and concluded that interest expenditure incurred by the partnership firm on account of interest paid to partners cannot be disallowed under Section 14A.

3. Investment in Real Estate and Guilt Funds and Its Taxability:
The assessee had made investments in real estate funds and guilt funds, which could generate taxable income. The Tribunal found that the AO and FAA had not properly investigated this matter. Therefore, the issue was remanded back to the AO for fresh adjudication, directing the AO to afford a reasonable opportunity of hearing to the assessee and for the assessee to produce documents related to taxable generating funds.

Conclusion:
The Tribunal decided in favor of the assessee regarding the interest expenditure incurred by the partnership firm on account of interest paid to partners, holding that it cannot be disallowed under Section 14A. However, the issue concerning the investment in real estate and guilt funds was remanded back to the AO for fresh adjudication. The appeal filed by the assessee was partly allowed. The order was pronounced in the open court on 19th April, 2017.