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TMI Blog2022 (7) TMI 954X X X X Extracts X X X X X X X X Extracts X X X X ..... d 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. - ITA Nos.201-202/Rjt/20 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... partners. Thus, the interest @ 6% on the value of investment is directly related to exempted income. Accordingly the AO worked out the interest of Rs. 36,44,303/- and disallowed the same being expenses directly incurred for earning exempted income under clause (a) of sub-rule (2) of Rule 8D of Income Tax Rule. Similarly, the AO worked out the administrative expenses of Rs. 1,61,996/- being 0.5% of average investment under clause (iii) of sub-rule (2) of Rule 8D of Income Tax Rule. Thus, the AO made disallowances of Rs. 38,06,300/- in aggregate which was added to the total income of the assessee. 6. On appeal, the learned CIT (A) confirmed the order of the AO. 7. Being aggrieved by the order of the learned CIT (A) the assessee is in appeal before us. 8. The learned AR for the assessee before us filed synopsis, paper book running from pages 1 to 30 and 1 to 96 along with written submission which are kept on record. The learned AR before us inter alia contended that disallowances under section 14A read with rule 8D of income tax rule cannot exceeds the exempted income. It was furnished that appellant assessee has earned dividend income of Rs. 29,05,561/- only whereas disallow ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 39; 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 per the present scheme of taxation, the interest payment on partners capital in essence is not treated as allowable business expenditure except for the deduction available under S. 40(b) of the Act. 11.1 Ostensibly, with effect from assessment year 1993-94, partnership firms complying with the statutory requirements and assessed as such are allowed deduction in respect of interest to partners subject to the limits and conditions specified in sect ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 v. 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 distinction between the two was blurred in the judicial precedents even for taxation purposes. 11.4 Section 4 of the Indian Partnership Act 1932 defines the terms partnership, partner, firm and firm name as under : Partnership is the relation between persons, who have agreed to share the profits of a business, carried on by all or any of the partners acting for all. Persons who have entered into partne ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tners 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 in terms of our opinion expressed hereinabove. 10.2 Fact of the issue on hand viz a viz the issue in above order is identical. Before us revenue has not pointed any distinguishing feature in the fact of case or change in law. Therefore respectfully following the above order we hold that interest paid to partner on their capital cannot be considered for the p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... imit 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. 10.6 In the result, the appeal of the assessee is partly allowed. Coming to ITA No. 202/Rjt/2017 an appeal by the assessee for the A.Y. 2013-14 11. The assessee has raised following grounds of appeal: 1. The order of the learned CIT(A) is bad in law and contrary to the facts of the case. 2. The leanred CIT(A) has erred in confirming the action of the AO disallowing expenses of Rs.48,49,645/- u/s.14A r.w.rule 8D of the IT rules. 3. The order of the learned CIT(A) is illegal, unjustified and against the principles of natural justice. 4. Without prejudice to the above you petitioner craves leave to add, amend, alter, vary or withdraw all or any of the grounds on or before the hearing of appeal. 12. The only issue raised by the assessee is that the learned CIT(A) erred in confirming the addition of Rs. 48,49,645/- made under section 14A read with rule 8D of Income Tax Rule ..... X X X X Extracts X X X X X X X X Extracts X X X X
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