2023 (3) TMI 195 - AT - Income Tax

Status of assessee as AOP instead of partnership firm - Another partnership firm as Partner in the present Firm through its Partner respectively - Restriction as per the Indian Partnership Act, 1932 - HELD THAT - The assessee firm was comprised of four individual partners who were representing their respective firms. It is, thus, in the backdrop of the aforesaid factual matrix that I shall herein deal with the proposition that as to whether or not such an arrangement is as per the mandate of law. It would be apposite to refer to the judgment of Ram Laxman Sugar Mills 1967 (3) TMI 17 - SUPREME COURT as observed, that the mere fact that the manager of a HUF describing himself as a representative of the family had entered into an agreement of partnership with other persons could not form a basis to infer that an agreement of partnership was intended contrary to law between the HUF and other partners. There was no justification on the part of the lower authorities to have recharacterized the assessee firm i.e. a firm comprising of individual partners (representing their respective firms) as an AOP . Thus, in terms of aforesaid observations set-aside the order of the CIT(Appeals) and direct the A.O. to assess the assessee firm in the status as that of a firm as therein claimed. Thus, the Ground of appeal No. 1 raised by the assessee is allowed in terms of my aforesaid observations. Disallowance u/s 14A - HELD THAT - When both interest free funds and interest-bearing funds are available, then, it can safely be presumed that the interest free advances or investments in exempt income yielding assets were made out of the interest free funds is supported by the judgment of Pr. CIT Vs. Sintex Industries Ltd 2017 (6) TMI 601 - GUJARAT HIGH COURT - Also, a similar view had been taken in the case of HDFC Bank Ltd. 2016 (3) TMI 755 - BOMBAY HIGH COURT Thus, in terms of my aforesaid observation that the assessee had sufficient interest free funds available with it to source the investments in exempt income yielding mutual funds, thus, vacate the disallowance made/sustained by the lower authorities u/s. 14A of the Act. Thus, the Ground of appeal No. 2 raised by the assessee is allowed in terms of my aforesaid observation. Disallowance of claim for deduction of donation - claim for deduction of expense incurred was related to its business, therefore, the same was disallowed by the A.O. in view of provisions of Section 37 - HELD THAT - Although the assessee specifically assailed the aforesaid disallowance before the CIT(Appeals), however, I find that the same had not been addressed by the said appellate authority while disposing off the appeal. Considering the fact that the CIT(Appeals) had failed to adjudicate the Ground of appeal No. 4, wherein the assessee had assailed the disallowance of its claim for deduction of donation restore the said issue to his file for adjudicating the same. Needless to say, the CIT(Appeals) shall grant a reasonable opportunity of being heard to the assessee while adjudicating the aforesaid issue. Thus, the Ground of appeal No. 3 raised by the assessee is allowed for statistical purposes.

Summary

Issues Involved:
1. Assessment status of the appellant as "AOP" instead of "partnership firm."
2. Disallowance under Section 14A of the Income-tax Act.
3. Disallowance of donation expense of Rs. 28,600.

Issue-wise Detailed Analysis:

1. Assessment Status as "AOP" vs. "Partnership Firm":
The primary issue was whether the appellant should be assessed as an "Association of Persons" (AOP) or a "partnership firm." The Assessing Officer (A.O.) argued that since a partnership firm cannot be a partner in another firm under the Indian Partnership Act, 1932, the appellant, constituted of four partnership firms, was invalid and should be assessed as an AOP. This view was supported by the Supreme Court's judgment in Dulichand Laxminarayan Vs. Commissioner of Income Tax (1956) 29 ITR 535 (SC).

However, the appellant contended that the partners were individuals representing their respective firms, not the firms themselves. This argument was supported by the Supreme Court's judgment in Rashik Lal & Co. Vs. CIT (1998) 229 ITR 458 (SC), which allows individuals to join a partnership in a representative capacity. The tribunal found that the "Partnership Deed" indicated individual partners representing their firms, thus rejecting the A.O.'s view. Consequently, the tribunal directed the A.O. to assess the appellant as a "partnership firm."

2. Disallowance under Section 14A:
The A.O. disallowed Rs. 13,19,518/- under Section 14A, arguing that the interest expenditure on borrowed funds could be related to exempt income from mutual funds. The appellant countered that it had substantial interest-free funds, evidenced by the balance sheet showing significant partner capital, which could cover the investments in mutual funds.

The tribunal agreed with the appellant, citing the Gujarat High Court's judgment in Pr. CIT Vs. Sintex Industries Ltd. (2018) 403 ITR 418 (Guj.) and the Bombay High Court's judgment in HDFC Bank Ltd. Vs. DCIT (2016) 383 ITR 529 (Bom.), which support the presumption that investments in exempt income-yielding assets are made from interest-free funds when both are available. The tribunal vacated the disallowance under Section 14A.

3. Disallowance of Donation Expense:
The appellant claimed a deduction for a donation expense of Rs. 28,600/-, which the A.O. disallowed under Section 37 of the Act, as the appellant could not substantiate its business relevance. The appellant raised this issue before the CIT(A), but it was not addressed.

The tribunal restored this issue to the CIT(A) for adjudication, directing that a reasonable opportunity be provided to the appellant to substantiate the claim.

Conclusion:
The appeal was partly allowed for statistical purposes. The tribunal directed the A.O. to assess the appellant as a "partnership firm" and vacated the disallowance under Section 14A. The issue of the donation expense was remanded to the CIT(A) for proper adjudication.