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TMI Blog2019 (11) TMI 926X X X X Extracts X X X X X X X X Extracts X X X X ..... e taxable income. Therefore, we hold that the Ld.CIT(A) has fairly restricted the disallowance proportionately on the basis of income earned by the assessee with regard to exempt income as well as the taxable, thus, we do not find any reason to interfere with the order of the Ld.CIT(A) and the same is upheld. - Decided against assessee - I.T.A.No.266/Viz/2019 - - - Dated:- 15-11-2019 - Shri V. Durga Rao, Judicial Member And Shri D.S. Sunder Singh, Accountant Member For the Appellant : Shri G.V.N.Hari, AR For the Respondent : Shri D.Manoj Kumar, DR ORDER PER SHRI D.S.SUNDER SINGH, ACCOUNTANT MEMBER : This appeal is filed by the assessee against the order of the Commissioner of Income Tax (Appeals)-6, Hyderabad in Appeal No. 0002/2015-16/B2/CIT(A)-6 dated 15.03.2019 for the Assessment Year (A.Y.) 2012-13. 2. In this case, all the grounds of appeal are related to sustaining the addition of ₹ 12,71,348/- out of the total addition of ₹ 16,41,509/- made by the Assessing Officer (AO) towards the disallowance of interest. The assessee is a partner in M/s S ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... me received and the unsecured loans. However, the Ld.CIT(A) observed that out of the investment made by the assessee in the partnership firm, the assessee had received two streams of income from the partnership firm, i.e interest on capital of ₹ 22,98,853/- and the share of profit from the firm of ₹ 78,94,246/-. Thus, the Ld.CIT(A) viewed that the share of profit from the firm being exempt u/s 10(2A), the expenditure relatable to earning of the share income attracts the disallowance u/s 14A of the Act r.w.r.8D of the Income Tax Rules. A ccordingly, the Ld.CIT(A) placing reliance on section 14A r.w. Rule 8D and the decision of Vishnu Anant Mahajan Vs. ACIT (2012), 22 taxmann.com 88 (Ahmedabad Tribunal Special Bench), Paras Bhomraj Oswal Vs. ACIT (2016) 50 ITR(T)554 (Pune-Tribunal) and the decision of ACIT Vs. Vinay Sehgal (2012) 27 taxmann.com 136 held that the interest expenditure on unsecured loans required to be apportioned proportionately to the share of profit from the partnership firm and the interest received on capital account in proportion to the income earned by the assessee. Accordingly restricted the disallowance to ₹ 12,71,348/- against actual disallow ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee that she was not provided with proper opportunity of being heard before finalization of the assessment order has not been commented upon by the AO. In the normal course during the remand proceedings, it is imperative on the part of the AO to verify the assessment record and to cull out the evidence to demonstrate that the issue of disallowance of interest expenditure was discussed with the. assessee or AR of the assessee, before the finalisation of the assessment order, by way of order sheet noting and issuing show cause notice proposing the addition/ disallowaice intended to be made by the AO. In the instant case, the AO has failed to adduce such evidence while submitting the report on the admissibility of additional evidence filed by the assessee, Under the circumstances, I am of the considered opinion that the AO had completed the assessment without providing proper opportunity of being heard, before resorting to disallowance of interest expenditure. Accordingly, the provisions of Rule 46A(1)(d) of the -Act are attracted to the facts of the instant case, and, therefore, I deem it fit to admit the additional evidence for the purpose of adjudicating the grounds of appeal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessee from the partnership firm of ₹ 1,01,93,099/-, a major chunk of ₹ 78,94,246/- is tax exempt in the hands of the assessee, which worked out to 77.45%. Further, the balance amount of ₹ 22,98,853/- which is taxable in the hands of the assessee constitute only 22.55% of the total income received from the partnership firm. 7.15. In view of the above, in the instant case, the provisions of section 14A of the Act are attracted wherein the expenditure incurred by the assessee in relation to tax exempt income shall not be allowed as deduction against taxable sources of income of the assessee. Accordingly, the interest expenditure claimed by the assessee attributable to taxable streams/sources of income from the firm i.e., interest on capital is only eligible as allowable expenditure. As a natural corollary, the proportionate interest expenditure attributable to tax exempt stream/sources of income from the firm i.e. share of profit should be disallowed as envisaged u/s. 14A of the Act rwr 8D of the Rules. 7.16. At this juncture, it is worthwhile to understand the provision of section 14A of the Act and Rule 8D o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... namely. - (i) the amount of expenditure directly relating to income which does not form part of total income ; and (ii) an amount equal to one percent of the annual average of themonthly averages of the opening and closing balances of the value of investment, income from which does not or shall not form part of total income: (3) ** ** ** (emphasis supplied) 7.17. Coming to the issue on hand, it is an admitted fact that the assessee, being a partner, has earned/received share of profit of ₹ 78,94,2461- from the partnership firm M/s Sree Tirumala Enterprises and claimed exemption of the same from taxation u/s. 10(2A) of the Act. Further, the assessee has not apportioned interest expenditure claimed of ₹ 16,41,509/- towards share of profit, but claimed the entire interest expenditure against taxable income earned / received from the partnership firm i.e., interest on capital of ₹ 22,98,853/-. 7.18. Accordingly, in terms of the provisions of section 14A rwr 8D of Rules, the assessee is eligible to claim interest expenditure as allowable deduction against ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t portion of the judgement is reproduced below for ready reference: In so far as share income is concerned, the field is occupied by the tax law, as it is enacted that the share income shall not form part of total income of the partners. 'Therefore, in view of this specific provision and the fact that the firm and partners are separately assessable entities, It will be difficult to hold that the share income is not excluded from the total income of the partner because the firm has already been taxed thereon. When section 10(2A) speaks of its exclusion from the total income, it means, the total income of the person whose case is under consideration. The instant case, is that of the partner and, therefore, what is to be examined is whether the share income is excluded from his total income. The answer is obviously in the affirmative. In such a situation, provision contained in section 14A will come into operation and any expenditure incurred in earning the share income will have to be disallowed. Thus, the Commissioner (Appeals) rightly held that the provision contained in section 14A is applicable to the facts of the case. Further, it has b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... share of profits from partnership firm is exempt from tax u/s 10(2A) of the Act in the hands of the partner. Therefore, it is tax free income in the hands of the assessee. The assessee has not made any disallowance for earning tax free income. The Assessing Officer has rightly invoked the provisions of section 14A r.w.Rule 8D for making such disallowance. The Circular No.8/2014 rather clarifies the reason as to why the share of profits of a partnership firm is exempt from tax in the hands of partner. The same is reproduced hereunder: 'SECTION 10(2A) OF THE INCOME TAX ACT, 1961.-. FIRM - SHARE OF PROFITS TO PARTNER OF FIRM - CLARIFICATION ON INTERPRETATION OF PROVISIONS OF SECTION 1O(2A) IN CASES WHERE INCOME OF FIRM IS EXEMPT CIRCULAR NO. 8/2014 [F NO. 173/99/2013-ITA-I], DATED 31-3-2014 A reference has been received in the Board in connection with the interpretation of provisions of section 10(2A) of the Income tax Act, 1961 ( Act ) seeking clarification as to what will be the amount exempt in the hands of the partners of a partnership firm in cases where the firm has claimed exemption/deduction under Chapter III or VI-A of the Act. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lowed under section 14A of the Act. 7.20. In view of the aforementioned factual matrix matrix and settled position of law, I am of the firm view that, in the instant case, the provisions of section 14A rwr 3D are squarely applicable. Accordingly, the AD is directed to restrict the disallowance of interest expenditure to the extent of RsJ2,71,348/-. Thus, the assessee would get a relief of ₹ 3,70,160/-. Hence, the grounds appeal Filed by the assessee are partly allowed, 8.0. In the result, appeal for the AY 2012-13 is partly allowed. 6.1. The Ld.AR submitted that the entire expenditure cannot not be allocated proportionately to the income earned on two different streams since, the income earned not only on account of capital contribution, but also on account of various services rendered by the firm. Therefore, requested to make the reasonable disallowance for capital contribution and also for other activities of earning the income. We have carefully considered the submissions of the Ld.AR and unable to convince with the argument of the Ld.AR, since, the share of profit is directly related to the capital contribution made ..... X X X X Extracts X X X X X X X X Extracts X X X X
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