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2022 (7) TMI 954 - AT - Income TaxDisallowance u/s 14A r.w.r. 8D - As argued interest paid on partner s capital is not expenses for the purpose of section 14A, indeed, the same is attribution of profit - HELD THAT - At the outset we find that this issue has been dealt by ITAT Pune Bench in case of Qualities Industries 2016 (10) TMI 56 - ITAT PUNE held that partnership firm and its partners are seen holistically and in a combined manner with costs towards interest eliminated in contra, the investment in mutual funds generating tax free income bears the characteristic of and attributable to its own capital where no disallowance u/s 14A read with Rule 8D is warranted. Consequently, the plea of the assessee is merited in so far as interest attributable to partners. However, the interest payable to parties other than partners, in our view, would be subjected to provisions of Rule 8D(2)(ii) of the Rules. Similarly, in the absence of any specific plea from assessee towards disallowance under Rule 8D(3), we hold it sustainable in view of express mandate of law. The matter is accordingly remanded back to the file of the Assessing Officer for re-computation of disallowance under Rule 8D r.w.s. 14A of the Act in terms of our opinion expressed hereinabove. Disallowances under rule 8D(2)(iii) r.w.s. 14A - As in the case of Asstt. CIT v. Vireet Investment (P.) Ltd. 2017 (6) TMI 1124 - ITAT DELHI had considered an identical issue and held that while computing average value of investments only those investments which yield exempt income in the year should be considered. Therefore, we are of the considered view that for computing disallowance under Rule 8D(2)(iii), those investments which yield exempt income only needs to be considered. Therefore, we set aside the issue to the file of the AO and direct him to re-compute disallowance in light of our discussions herein above which comes. Addition cannot exceeds the amount of exempted income - We direct the AO to limit the disallowance under section 14A read with rule 8D of Income Tax Rule, if any, then it should be lower of exempted income or the disallowance made under section 14A r.w.r. 8D of Rules of Income Tax Rules. Thus the grounds of appeal raised by the assessee is partly allowed.
Issues Involved:
1. Legality and validity of the CIT(A)'s order. 2. Disallowance of expenses under Section 14A read with Rule 8D of the Income Tax Rules. 3. Principles of natural justice. Issue-Wise Detailed Analysis: 1. Legality and Validity of the CIT(A)'s Order: The assessee contended that the order of the CIT(A) is "bad in law and contrary to the facts of the case." This claim was raised as a general ground of appeal without specific details provided in the judgment. 2. Disallowance of Expenses under Section 14A read with Rule 8D: The primary issue raised by the assessee was the disallowance of expenses amounting to Rs. 38,06,300/- for AY 2012-13 and Rs. 48,49,645/- for AY 2013-14 under Section 14A read with Rule 8D of the Income Tax Rules. - Assessee's Argument: - The assessee argued that the disallowance under Section 14A cannot exceed the exempted income, which was Rs. 29,05,561/- for AY 2012-13. - It was contended that only those investments yielding exempted income during the year should be considered while computing disallowances under Rule 8D(2)(iii). - The assessee also argued that the interest paid to partners should not be considered for disallowance under Section 14A, as it is an attribution of profit rather than an expense. - Revenue's Argument: - The Revenue supported the orders of the AO and CIT(A), which disallowed expenses based on the application of Rule 8D. - Tribunal's Findings: - Interest on Partner's Capital: The Tribunal referred to the ITAT Pune Bench decision in Qualities Industries Vs. JCIT, where it was held that interest paid to partners is not an expenditure for the purposes of Section 14A. The Tribunal agreed with this view and concluded that interest paid to partners on their capital cannot be considered for disallowance under Section 14A. - Investments Yielding Exempt Income: The Tribunal cited the ITAT Special Bench of Delhi in Asstt. CIT v. Vireet Investment (P.) Ltd., which held that only those investments yielding exempt income during the year should be considered for disallowance under Rule 8D(2)(iii). The Tribunal directed the AO to re-compute the disallowance accordingly. - Disallowance Exceeding Exempt Income: The Tribunal referred to the Delhi High Court judgment in P.CIT vs. Craft Builders & Construction (P.) Ltd., which held that disallowance under Section 14A cannot exceed the exempt income. The Tribunal directed the AO to limit the disallowance to the lower of the exempt income or the disallowance computed under Rule 8D. 3. Principles of Natural Justice: The assessee claimed that the order of the CIT(A) was "illegal, unjustified and against the principles of natural justice." However, the Tribunal's judgment did not provide specific details on this issue, and it appears to have been raised as a general ground. Conclusion: The appeals for both AY 2012-13 and AY 2013-14 were partly allowed. The Tribunal directed the AO to re-compute the disallowance under Section 14A read with Rule 8D by considering only those investments yielding exempt income and limiting the disallowance to the amount of exempt income. The interest paid to partners on their capital was excluded from the disallowance computation. The Tribunal's findings for AY 2012-13 were applied to AY 2013-14 as well.
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