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TMI Blog2017 (4) TMI 967X X X X Extracts X X X X X X X X Extracts X X X X ..... RAJENDRA, AM Challenging the order dated 11/05/2015,of CIT (A)-29,Mumbai the assessee has filed the present appeal. Assessee-firm, engaged in the business of manufacturing of bulk drugs and intermediates, filed its return of income on 29/09/2012,declaring total income of ₹ 1.58 crore. The Assessing Officer(AO)completed the assessment u/s.143(3)of the Act,on30/01/2015,determining its income at ₹ 2,00,12,590/-.During the course of hearing before us, grounds 2,4,5,6 and 8 were not pressed. Hence, same stands dismissed, as not pressed. 2. Effective ground of appeal (Gs.OA-3,5 and 7) is about disallowance made by the AO u/s. 14A of the Act, amounting to ₹ 41.68 lakhs During the assessment proceedings, the AO found that the assessee had received dividend income of ₹ 9.21 lakhs and long-term capital gain of ₹ 19.44 lakhs, that it had claimed exemption u/s. 10 (34) and 10 (38) respectively. He applied provisions of section 14A read with Rule 8D (ii) of the Income Tax Rules, 1962 (Rules) and disallowed ₹ 38.78 lakhs under the head interest expenditure and 0.5% of average value of investment at ₹ 1.78 lakhs. 3 . Aggrieved by the order o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 7; 1.97 lakhs should not have been made. After considering the submission of the assessee and the assessment order, the FAA held that the partners capital was of Ruby 702.53 lakhs unsecured loan of 40.04 lakhs and investment in shares was for 56.09 lakhs, that during the year under consideration there was an increase in investment by about ₹ 125 lakhs, that sources of all funds invested in shares was either partners capital or unsecured loan or the borrowing from the banks, that interest was paid to partners on their capital on the unsecured loans and borrowings from the banks, that the assessee did not have any interest refunds available for making the investment in shares, that the assessee had no interest free-funds available for making investments, that all the funds used by it in its business, including funds used in making the investment, was interest-bearing funds, that interest expenditure was attributable to the investment, including the investment made during the year and also investment made in the past. Distinguishing the cases referred by the assessee, the FAA held that case under consideration was of a firm and not of the partners, that the issue involved was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... found that the Tribunal has dealt the issue, in detail, in the case of Quality Industries (supra). We would like to reproduce the relevant portion of the order of the tribunal and it reads as under: 10. We have carefully considered the rival submissions. The pre-dominant question that arises for our consideration is whether payment of interest to the partners by the partnership firm toward use of partner s capital is in the nature of expenditure or not for the purposes of section 14A of the Act and consequently, whether interest on partners capital is amenable to section 14A or not in the hands of partnership firm. 11. In order to adjudicate this legal issue, we need to appreciate the nuances of the scheme of the taxation. We note that prior to amendment of taxation laws from AY 1993-94, the interest charged on partners capital was not allowed in the hands of partnership firm while it was simultaneously taxable in the hands of respective partners. An amendment was inter alia brought in by the Finance Act 1992 in section 40(b) to enable the firm to claim deduction of interest outgo payable to partners on their respective capital subject to some upper limits. Hence, as pe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ons, but it is not a full person. Since a contract of employment requires two distinct persons, viz., the employeer 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 of the firm. Held accordingly, the salary paid to a partner by a firm which grows and sells tea, is exempt from tax, under rule 24 of the Indian Income-tax Rules, 1922, to the extent of 60 per cent thereof, representing agricultural income and is liable to tax only to the extent of 40 per cent. Supreme Court has also held in the case of CIT vs. Ramniklal Kothari (1969) 74 ITR 57 (SC) that the business of the firm is business of the partners of the firm and, hence, salary, interest and profits received by the partner from the firm is business income and, therefore, expenses incurred by the partners for the purpose of earning this income from the firm are admissible as deduction from such share income from the firm in which he is partner. Thus, the partnership firm and partners have been collectively seen and the distin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e is not adversely affected at all by the claim of interest on capital employed with the firm by the partnership firm and partners put together. Thus, capital diverted in the mutual funds to generate alleged tax free income does not lead to any loss in revenue by this action of the assessee. In view of the inherent mutuality, when the 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 under 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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