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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 ..... der 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. 3. The only issue raised by the assessee is that the learned CIT(A) erred in confirming the addition of Rs. 38,06,300/- made under section 14A read with rule 8D of Income Tax Rule. 4. The assessee is a partnership firm and engaged in the business of trading of Gold and Silver and Shares. During the year under consideration, the assessee firm has earned dividend income of Rs. 29,05,861/- which was claimed as exempted income under section 10(34/35) of the Act. However, the assessee has not made any disallowance of corresponding expenses under the provision of 14A of the Act. On question, the assessee submitted that the investments were made in earlier year out the fund available in the form of partner's capital and no expense was incurred to earn such dividend income. Therefore, no disallowance under section 14A of the Act is required to be made. 5. The AO being dissatisfied with the submission of the assessee held that the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... repeat the same. At the outset we note that the AO has made the disallowance of Rs. 38,06,300/- under section 14A read with rule 8D of Income Tax Rule against exempted income of Rs. 29,05,561/- only. The learned AR before us made argument on three folds. First fold of argument is that the disallowances under section 14A cannot exceed the amount of exempted income. The second fold of argument is that while computing the disallowances of expenses under clause (iii) of the Rule 8D(2) being 0.5% of the average value of investment only those investment yielding exempted income should only be considered. Third fold of argument is that the interest paid on partner's capital is not expenses for the purpose of section 14A, indeed, the same is attribution of profit. 10.1 We proceed to adjudicate the third fold of argument first. At the outset we find that this issue has been dealt by ITAT Pune Bench in case of Qualities Industries Vs. JCIT reported in 161 ITD 2017,where the coordinate bench has decided the issue in favour of the assessee by observing as under: 10. We have carefully considered the rival submissions. The pre-dominant question that arises for our consideration is whether pa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rview of s. 36 or 37 of the Act. Notably, there has been no amendment in the general law provided under Partnership Act 1932. The amendment to section 40(b) as referred hereinabove has only altered the mode of taxation. Needless to say, the Partnership firm is not a separate legal entity under the Partnership Act. It is not within the purview of the Income-tax Act to change or alter the basic law governing partnership. Interest or salary paid to partners remains distribution of business income. 11.3 Relevant here to refer to decision of Hon'ble Supreme Court in the case of R.M. Chimbaram Pillai (supra) relied upon by the Assessee. Supreme Court has held in the case of R.M. Chidambaram Pillai, etc. (supra) held that: "A firm is not a legal person, even though it has some attributes of personality. In Income-tax law, a firm is a unit of assessment, by special provisions, but it is not a full person. Since a contract of employment requires two distinct persons, viz., the employer 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ply the test laid down under section 36 of the Act to find out whether the capital was borrowed for the purposes of business or not. Thus, the question of allowability or otherwise of deduction does not arise except for S. 40(b) of the Act. 11.5 As noted, as per the scheme of the Act, the interest paid by the firm and claimed as deduction is simultaneously susceptible to tax in the hands of its respective partners in the same manner. In the same vain, the firm is merely a compendium of its partners and its partners do not have separate legal personalities under the basic law as discussed. The interest paid to partners and simultaneously getting subjected to tax in the hands of its partners is merely in the nature of contra items in the hands of the firms and partners. Consequently interest paid to its partners cannot be treated at par with the other interest payable to outside parties. Thus, in substance, the revenue 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee that the amount of disallowance under section 14A r.w.r. 8D cannot exceed the amount of exempted income. In this regard we find pertinent to refer the judgment of the Hon'ble Delhi High Court in case of P.CIT vs. Craft Builders & Construction (P.) Ltd. reported in (2019) 101 taxmann.com 167 and further SPL filed by the revenue against such order was dismissed by the Hon'ble Supreme Court in 112 taxmann.com 322 where the Hon'ble High court held as under: "25. Total exempt income earned by the respondent-assessee in this year was Rs. 19 lakhs. In these circumstances, we are not required to consider the case of the Revenue that the disallowance should be enhanced from Rs. 75.89 crores to Rs. 144.52 crores. Upper disallowance as held in Pr. CIT v. McDonalds India (P.) Ltd. ITA 725/2018 decided on 22nd October, 2018 cannot exceed the exempt income of that year. This decision follows the ratio and judgment of the Supreme Court in the case of Maxopp Investments Ltd. v. CI T[2018] 402 ITR 640/254 Taxman 325/91 taxmann.com 154 and the earlier judgments of the Delhi High Court in Cheminvest v. CIT [2015] 378 ITR 33/234 Taxman 761/61 taxmann.com 118 and CIT v. Holcim (P.) Ltd. ..... X X X X Extracts X X X X X X X X Extracts X X X X
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